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Pegasus Recycling Has a Subsidiary That Recycles Yard Waste and Another

question 93

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Pegasus Recycling has a subsidiary that recycles yard waste and another that recycles paper. Information related to the two subsidiaries follows.  Yard Recycling  Paper Recycling  Total assets $8,000,000$15,000,000 Noninterest-bearing current liabilities 500,0001,000,000 Net income 1,500,0002,600,000 Interest expense 600,000800,000 Required rate of return 8%11% Cost of capitall 7%9% Tax rate 30%32%\begin{array}{lrr}&\text { Yard Recycling }&\text { Paper Recycling }\\\hline\text { Total assets } & \$ 8,000,000 & \$ 15,000,000 \\\text { Noninterest-bearing current liabilities } & 500,000 & 1,000,000 \\\text { Net income } & 1,500,000 & 2,600,000 \\\text { Interest expense } & 600,000 & 800,000 \\\text { Required rate of return } & 8 \% & 11 \% \\\text { Cost of capitall } & 7 \% & 9 \% \\\text { Tax rate } & 30 \% & 32 \%\end{array} Based on the limited information, which subsidiary is the best candidate for expansion?


Definitions:

Allowance for Doubtful Accounts

A contra-asset account used to estimate and offset the amount of receivables that may not be collected.

Uncollectible Accounts

Accounts receivable that a company does not expect to collect due to customer defaults.

Bad Debt Expense

The estimated amount of credit sales that are not expected to be collected, representing potential loss to the company.

Allowance Method

An accounting technique used to account for bad debts, where estimated uncollectible accounts are expensed, adjusting the accounts receivable balance.

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