Problem one.

Question text

Estimating the Cost of Equity Capital

Kellogg Company manufactures cereal and other convenience food under its many well-known brands such as Kellogg's, Keebler, and Cheez-It. The company, with over $13.5 billion in annual sales worldwide, partially finances its operation through the issuance of debt. At the beginning of its 2015 fiscal year, it had $6.5 billion in total debt. At the end of fiscal year 2015, its total debt had increased to $6.6 billion. Its fiscal 2015 interest expense was $227 million, and its assumed statutory tax rate was 37%.

Kellogg has an estimated market beta of 0.40. Assume that the expected risk-free rate is 2.5% and the expected market premium is 5%.

a. What does Kellogg's market beta imply about its stock returns?

A beta of 0.40 indicates Kellogg's stock is less volatile than the market index.

A beta of 0.40 indicates Kellogg's stock is more volatile than the market index.

A beta of 0.40 indicates Kellogg's stock moves perfectly with the market index.

b. Estimate Kellogg's cost of equity capital.

Round answer to one decimal place (ex: 0.0245 = 2.5%).

Problem 03.

Stock: Terreno Realty Corporation (TRNO)

Rd=2.40% (cost of debt)

Re=4.41% (cost of equity)

WACC=3.94%

This is the full question, I only need part 3 two-stage FCFE:

Using the cost of equity, cost of debt, and WACC you computed in PHASE I, compute absolute valuation measures for the value of your stock. You must complete ll four valuation measures. You may adjust your estimates of re, rd, and WACC if you find that a different estimate makes sense. However, you must use the same cost of equity for all four calculations (cost of equity is the same no matter which valuation model is used).

1. DDM: Compute the DDM estimated value using your estimate of r from PHASE I and your estimate of g. Also, produce a Sensitivity Analysis Table like the one in my lecture notes. Show the stock price for small changes in g and r. Also, use the current stock price and your estimate of r to compute the implied growth rate for you stock.

2. Two-stage DDM: Use your estimate of short-term and long-term growth in dividends to value the stock. Explain how you came up with the estimates of g. If your stock does not pay dividends, use one of the models from the textbook for computing DDM on non-dividend stocks.

3. Two-stage FCFE: Use your estimates of short-term and long-term growth in free cash flow to value the stock. Explain how you came up with the estimates of g. While it is possible to use different growth rates for FCFE and DDM, for most companies both dividends and free cash flow to equity grow at the same rate in the long run.

4. Two-stage FCFF. For 2-stage FCFF, use the WACC as your cost of capital and estimate the short- term and long-term values of g for the cash flows to the firm. Compute both the value of the entire firm as well as the value of equity using this model (subtract the value of debt from the value of the firm to get the value of equity). Note that your estimates of g for the FCFF calculation must be lower than g for FCFE and DDM (because of leverage).

Section B.

QUESTION 01 (67 marks) Adam is a Graduate who was planning to start up his own business soon after his studies in Business Management. He achieved his goal by starting up Adam Enterprise on 01/07/2020 and completed the following transactions during the month. 01/07 Invested $25,000 in cash. 01/07 Employed a receptionist and agreed to pay $1,500 fortnightly. 03/07 Paid quarterly office building rent $3,300. 03/07 Paid for office computers $4,400. Computers are expected to remain in service for 5 years. 04/07 Purchased office furniture on credit $2,000. The furniture should last for 10 years. 05/07 Purchased supplies on credit, $1,000, terms 2/10, n/30. 08/07 Performed services for a client on credit $ 1,000. 11/07 Received an advance payment of $500 for a service to be performed. 12/07 Performed service for a client and received cash $2,000. 14/07 Paid for the supplies purchased on 05/07. 16/07 Sent an invoice for a client for services rendered $ 500. 17/07 Paid utility expenses $250. 18/07 Adam spent $ 500 for his birthday party which was funded by Adam Enterprise. Required: Prepare the following for 30/07/2020. (a) Journal entries (30.5 marks) (b) Cash Ledger (4.5 marks) (c) Statement of Financial Performance (Income Statement) (10 marks) (d) Statement of Changes in Equity (2 marks) (e) Statement Financial Position (Balance sheet) (20 marks) ACT501 Accounting Principles, Mid-term written assignment, Semester 1, 2021. Page 3 of 4 QUESTION 02 (11 marks) On May 31, 2020, Cullen Company had a cash balance per books of $14,000. The bank statement showed a balance of $42,500 on that day. A comparison of the statement with the Cash account revealed the following facts. 01. A $ 14,500 cheque which was deposited on 30/05/2020 was not recorded in the bank statement. 02. A $50,000 note receivable was collected by the bank. 03. Two cheques for $15,000 and $20,000 which were issued for suppliers were not presented to the bank yet. 04. A $32,000 cheques which was received by a customer was deposited in the bank on 26/05/2020 has been bounced. 05. The statement included a Debit memo $500 and a standing order payment $9,500 for a life Insurance. (a) Show the adjusted bank balance as per books as at 31/05/2020. (8 marks) (b) Prepare the bank reconciliation for the month of May. (3 marks) QUESTION 03 (15 marks) On 01/03/2020 Gavin opened a stationary shop and the following transactions occurred. Show the impact of these transactions under the accounting equation. You may have these columns under the equation. Plant & Equipment, Inventory, Receivables, Cash, Payables, other payables, Capital, Retained earnings 01/03 Gavin invested $6000 in cash and $500 worth of furniture 01/03 Purchased stationary for $3000 for cash. 03/03 Sold $1500 stationary for cash and the cost of stationary was $1000. 04/03 Sold $2000 stationary on credit to Sarah. The cost of stationary was $1500. 04/03 Purchased stationary on credit $4000. 05/03 Sold $2800 stationary on credit to Alex and the cost of stationary was $3000 10/03 Received the payment from Sarah. 15/03 Sold stationary for cash $1200 and the cost was $1500 15/03 Paid salaries for the helper $ 1000 27/03 Alex paid the amount due. 28/03 Payment was settled with relevant to the purchase on 04/03. 30/03 Rent for the month was $400 and paid $300. ACT501 Accounting Principles, Mid-term written assignment, Semester 1, 2021. Page 4 of 4 QUESTION 04 (7 marks) Hay Traders established a $150 petty cash fund for small expenditures. Hay decided to replenish the account when the balance reach $80. The following transactions occurred in the first two weeks of the month of March 2020. Date Voucher No. Description Amount $ 04/03 01 Entertainment expense 50 06/03 02 Stamp and envelop expenses 10 06/03 03 Cleaning liquids and other cleaning expense 15 07/03 04 Miscellaneous expense 5 10/03 05 Postage 10 12/03 06 Travelling expense 20 13/03 07 Freight out 30 Required:

1. Show the journal entries to establish the petty cash fund. (2 marks)

2. Show the journal entries to replenish the fund. (2 marks)

3. Show the journal entries assuming that a decision was made to increase the fund to $200. (2 marks)

4. Prepare the petty cash book for Hay Traders, with appropriate analysis columns to incorporate the transactions shown above. (8 marks)

Calculate

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