Economics Answers

Why should decision makers set MB equal to MC?

In the circular flow of income and spending financial institutions?

In the circular flow of income and spending financial institutions

The King Food Corp. currently has no debt in its capital structure. The beta of its capital is 1.5. The King Food Corp’s free cash flow is expected to equal £30 million next year. This cash flow is expected to grow at 2% per year for the foreseeable future. King Food Corp. is considering changing its capital structure by issuing debt and using the proceeds to buy back stock. It will do so in such a way that it will have a 50% debt-to-equity ratio (D/E=50%) after the change, and it will maintain this debt-equity ratio forever. Assuming King Food Corp’s pretax cost of debt will be 5%. King Food Corp. faces a corporate tax rate 40%. Assuming that the CAPM holds, the risk-free rate is 3%, and the expected market index risk premium is 8%.

(b) Using the information provided and your calculations in part (a) and (b), determine the value of tax shield acquired by King Food Corp. if it changes its capital structure with a 50% debt-to-equity ratio (D/E=50%).                                   

The King Food Corp. currently has no debt in its capital structure. The beta of its capital is 1.5. The King Food Corp’s free cash flow is expected to equal £30 million next year. This cash flow is expected to grow at 2% per year for the foreseeable future. King Food Corp. is considering changing its capital structure by issuing debt and using the proceeds to buy back stock. It will do so in such a way that it will have a 50% debt-to-equity ratio (D/E=50%) after the change, and it will maintain this debt-equity ratio forever. Assuming King Food Corp’s pretax cost of debt will be 5%. King Food Corp. faces a corporate tax rate 40%. Assuming that the CAPM holds, the risk-free rate is 3%, and the expected market index risk premium is 8%.

(a)  Calculate the WACC before the change in capital structure and after change in the capital structure, respectively.                                                            

The King Food Corp. currently has no debt in its capital structure. The beta of its capital is 1.5. The King Food Corp’s free cash flow is expected to equal £30 million next year. This cash flow is expected to grow at 2% per year for the foreseeable future. King Food Corp. is considering changing its capital structure by issuing debt and using the proceeds to buy back stock. It will do so in such a way that it will have a 50% debt-to-equity ratio (D/E=50%) after the change, and it will maintain this debt-equity ratio forever. Assuming King Food Corp’s pretax cost of debt will be 5%. King Food Corp. faces a corporate tax rate 40%. Assuming that the CAPM holds, the risk-free rate is 3%, and the expected market index risk premium is 8%.

 Key Insurance Agency was organized on October 1, 2020. Assume that the accounts are closed and financial statements prepared each month. The company occupies rented office space but owns office equipment estimated to have a useful life of 10 years from date of acquisition, October 1. The trial balance for Key Insurance Agency at December 31 is shown below.

Cash $22,565

Accounts Receivables 7.050

Office Equipment 9,600

Accumulated Depreciation: Office Equipment 160

Accounts Payable 2,260

Income Taxes Payable 4,965

Capital Stock 20,000

Retained Earnings 7,450

Dividends 2,500

Commissions Earned 31,080

Advertising Expense 2,400

Salaries Expense 18,000

Rent Expense 3,800

Totals $65,915 $65,915

a. Prepare the adjusting entry to record depreciation of the office equipment for the month of December, using the straight line method of computing depreciation expense.

b. adjusted trial balance.

How to calculate the annual cash flow arising from the production of both goods

Draw the indifference curve fir someone is deciding to allocate time between work and leisure. What will be the shape of labour supply curve?

Draw the indifference curve for someone is deciding to alloacate time between work and leisure.what will be the shape of labour supply curve?