With inflation, what are the implications of using LIFO and FIFO inventory methods? How do they affect the cost of goods sold?
Due to higher new inventory costs in an inflationary climate, the current COGS under LIFO would be higher. The business would report lower earnings or net income due to the period.
FIFO (or First-in, First Out) will give higher profit margins in an inflationary period. The cost of newer goods will be higher than that of older goods—that's why selling off older low-cost goods first will give a higher profit.
The last-in, first-out (LIFO) method of tax accounting for inventories is advantageous in an inflationary economy because it enables a taxpayer to compute a higher cost of goods sold deduction by using an inflated current cost instead of a lower cost of goods sold deduction based on the lower historical cost
Question: Morgan Jennings, a geography professor, invests $50,000 in a parcel of land that is expected to increase in value by 12 percent per year for the next five years. He will take the proceeds and provide himself with a 10-year annuity. Assuming a 12 percent interest rate, how much will this annuity be?
Cal Lury owes $10,000 now. A lender will carry the debt for five more years at 10 percent interest. That is, in this particular case, the amount owed will go up by10 percent per year for five years. The lender then will require that Cal pay off the loan over the next 12 years at 11 percent interest. What will his annual payment be?
Question: Maxwell Communications paid a dividend of $3 last year. Over the next 12 months, the dividend is expected to grow at 8 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of return (Ke) is 14 percent. Compute the price of the stock (P0)
Question: Ecology Labs Inc. will pay a dividend of $6.40 per share in the next 12 months (D1). The required rate of return (Ke) is 14 percent and the constant growth rate is 5 percent.
a. Compute P0. (For parts b, c, and d in this problem, all variables remain the same except the one specifically changed. Each question is independent of the others.)
b. Assume Ke, the required rate of return, goes up to 18 percent. What will be the new value of P0?
c. Assume the growth rate (g) goes up to 9 percent. What will be the new value of P0? Ke goes back to its original value of 14 percent.
d. Assume D1 is $7.00. What will be the new value of P0? Assume Ke is at its original value of 14 percent and g goes back to its original value of 5 percent.
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