Part A: Please complete the following table with the type of security (Trading,
ID: 2493949 • Letter: P
Question
Part A: Please complete the following table with the type of security (Trading, Available for Sale, or Held to Maturity), AND the type of unrealized gains/losses (Temporary or Permanent). (2 Points)
TYPE OF GAIN/LOSS
TYPE OF INVESTMENT
TYPE OF GAIN / LOSS
Unrealized Gain - Income
Unrealized Gain - Equity
Unrealized Loss - Equity
Unrealized Loss - Income
Part B: The following are key statistics for two similar companies.
ATTRIBUTE
DEGAREVEL COMPANY
YTIUQE COMPANY
Return on Assets
20%
20%
Equity
$100,000
$300,000
10% Bonds issued at face value
200,000
0
The two companies have no other liabilities or equity, and assume no corporate taxes. Hint: A = L + E
Required: Compute the return on contributed equity for each of the two companies and comment on the effectiveness of financial leverage. DESCRIPTIVELY SHOW YOUR WORKINGS
TYPE OF GAIN/LOSS
TYPE OF INVESTMENT
TYPE OF GAIN / LOSS
Unrealized Gain - Income
Unrealized Gain - Equity
Unrealized Loss - Equity
Unrealized Loss - Income
Explanation / Answer
Part A:Complete the following table with the type of security (Trading, Available for Sale, or Held to Maturity), AND the type of unrealized gains/losses (Temporary or Permanent) :
TYPE OF GAIN/LOSS
TYPE OF INVESTMENT
TYPE OF GAIN / LOSS
Unrealized Gain - Income
Trading
Temporary
Unrealized Gain - Equity
Available for Sale
Permanent
Unrealized Loss - Equity
Available for Sale
Permanent
Unrealized Loss - Income
Trading
Temporary
Part B: The following are key statistics for two similar companies.
ATTRIBUTE
DEGAREVEL COMPANY
YTIUQE COMPANY
Return on Assets
20%
20%
Equity
$100,000
$300,000
10% Bonds issued at face value
200,000
0
$60,000
DEGAREVEL COMPANY has used the leverage of fixed interest Bond to raise the return to the Equity Shareholders which YTIUQE COMPANY has not used so the return to equity remains the same as that of return to assets. A company has to use the fixed expense securities to increase the return to Equity as long as fixed expense is less than the return on capital employed. So, the capital structure of DEGAREVEL COMPANY is more effective and profitable for Equity.
TYPE OF GAIN/LOSS
TYPE OF INVESTMENT
TYPE OF GAIN / LOSS
Unrealized Gain - Income
Trading
Temporary
Unrealized Gain - Equity
Available for Sale
Permanent
Unrealized Loss - Equity
Available for Sale
Permanent
Unrealized Loss - Income
Trading
Temporary