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A Single Father’s Tax Situation Ever since his wife’s death, Eric Stanford has faced difficult personal and financial circumstances. His job provides him with

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A Single Father’s Tax Situation

Ever since his wife’s death, Eric Stanford has faced difficult personal and financial circumstances. His job provides him with a fairly good income but keeps him away from his daughters, ages 8 and 10, nearly 20 days a month. This requires him to use in-home child care services that consume a large portion of his income. Since the Stanfords live in a small apartment, this arrangement has been very inconvenient. Due to the costs of caring for his children, Eric has only a minimal amount withheld from his salary for federal income taxes. This makes more money available during the year, but for the last few years he has had to make large payments in April another financial burden. Although Eric has created an investment fund for his daughters’ college education and for his retirement, he has not sought to select investments that offer tax benefits. Overall, he needs to look at several aspects of his tax planning activities to find strategies that will best serve his current and future financial needs. Eric has assembled the following information for the current tax year:

Earnings from wages $48,340
Interest earned on savings $125
IRA deduction $2,800
Checking account interest $65
Three exemptions $3,650 each
Current standard deduction for
filing status $8,000
Amount withheld for federal
income tax $3,178
Tax credit for child care $400
Filing status Head of household

Questions

1. What are Eric’s major financial concerns in his current situation?

2. In what ways might Eric improve his tax planning efforts?

3. Is Eric typical of many people in our society with regard to tax planning? Why or why not?

4. What additional actions might Eric investigate with regard to taxes and personal financial planning?

Bart Industries is about to be purchased by Kramer Enterprises. Both firms are in the rocks and mineral industry. As one of the founders of

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Bart Industries is about to be purchased by Kramer Enterprises. Both firms are in the rocks and mineral industry. As one of the founders of Bart Industries, you are concerned about the value of the equity in the firm. You have acquired the following data on your firm:

1. Bart has 200,000 shares of stock authorized, with 120,000 shares outstanding and held by the current owners.
2. The free cash flows for next year are estimated to be $642,000.
3. The WACC for the firm is currently 13%
4. Bart has $320,000 of outstanding debt.
5. The growth rate for Bart is estimated to be 5% for the future.
6. Bart has a surplus of cash in the amount of $985,000.

Required:

What is the value of Bart’s equity?

Can you please help me with the following scenario? Thank you! With a click of the mouse, Mackenzie enters the auto “showroom.” In the past few months she had

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Can you please help me with the following scenario? Thank you!

With a click of the mouse, Mackenzie enters the auto “showroom.” In the past few months she had realized that the repair costs for her 11-year-old car were accelerating. She thought it was time to start shopping for a new car online and decided to start her Internet search for a vehicle by looking at a small and mid-sized SUV’s. Her friend suggested that Mackenzie research more than one type of vehicle. They reminded her that comparable models were available from various auto manufacturers.
In her online car buying process, Mackenzie next did a price comparison. She obtained more than one price quote by using various online sources. She then prepared an overview of her online car buying experiences.
Mackenzie’s next step was to make her final decision. After selecting what she planned to buy, she finalized the purchase online and decided to take delivery at a local dealer.
In recent years, less than 5 percent of car buyers have actually purchased vehicles over the Internet. That number is increasing; however, car buying experts strongly recommend that you make a personal examination of the vehicle before taking delivery.

Questions:
1. Based on Mackenzie’s experience, what benefits and drawbacks are associated with online car buying?
2. What additional actions might Mackenzie consider before buying a motor vehicle?
3. What do you consider to be the benefits and drawbacks of shopping online for motor vehicles and other items?

Bogus Brushstroke: Art Fraud Richard received a letter inviting him to participate in a drawing for a free original

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Bogus Brushstroke: Art Fraud

Richard received a letter inviting him to participate in a drawing for a free original lithograph by a famous artist. He was asked to return a postcard with his name, address, and phone number. After he returned the postcard, he was telephoned for more information, including his credit card number. At some point, the caller asked Richard to buy a print, using such glowing terms as “fabulous opportunity,” “one-time offer,” “limited edition,” and “excellent work of a famous artist.” The artist, the caller said, was near death and the print’s value would increase after the artist’s death. He was assured that when the artist died, the company that the caller represented would gladly buy back the print at two to three times what he paid for it and that he could always resell the print elsewhere at a substantial profit. He was told that he would receive a certificate to the “authenticity” of the print. And he was promised a trial exami-nation period with a 30-day money-back guarantee.

Questions

1. Does the offer seem genuine to you? Explain your answer.

2. How can Richard protect himself against a phony offer? List at least five suggestions that you would give him.

3. If Richard bought the work of art and discovered fraud, how should he try to resolve his dispute with the company that sold it to him? Where should he complain if the dispute

Find the following values for a lump sum assuming annual compounding: a. The future value of $500 invested at 8 percent for one year.

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Find the following values for a lump sum assuming annual compounding:
a. The future value of $500 invested at 8 percent for one year.
b. The future value of $500 invested at 8 percent for 5 years.
c. The present value of $500 to be received in one year when the opportunity cost rate is 8 percent.
d. The present value of $500 to be received in five years when the opportunity cost rate is 8 percent.

Find the following values assuming a regular, or ordinary, annuity:
a. The present value of $400 per year for ten years at 10 percent.
b. The future value of $400 per year for ten years at 10 percent.
c. The present value of $200 per years for five years at 5 percent.
d. The future value of $200 per year for 5 years at 5 percent.

The cost of equity (discount rate) can also be determined by using the Capital Asset Pricing Model (CAPM). Calculating the cost of equity using the CAPM model is

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The cost of equity (discount rate) can also be determined by using the Capital Asset Pricing Model (CAPM). Calculating the cost of equity using the CAPM model is often more difficult than using the dividend discount model. The companies’ financial statements do not show the cost of equity.

The following table shows necessary (hypothetical) information to calculate the cost of equity by using the CAPM model:

Company
Listing
RRF
RM
ßj

Nike Inc.
NYSE: NKE
0.40%
6.50%
0.90
Sony Corporation
NYSE: SNE
0.40%
9.50%
1.60
McDonald’s Corporation
NYSE: MCD
0.40%
8.50%
0.40

E(rj)= RRF + βj (RM – RRF)

E(rj) – The cost of equity

RRF – Risk-free rate of return

ßj – Beta of the security

RM – Return on market portfolio

Based on the above information, which company has higher cost of equity? Why? Briefly explain your reasoning.
The CAPM model shows that risk-free rate of return, return on market portfolio, and company beta determine the cost of equity.

What type of factors influence company beta? Briefly describe the factors that influence company beta. For example, higher financial leverage (total liabilities to total assets ratio) can lead to higher company beta.