Wendell Is an Executive with CFO Tires

question 130

Essay

Wendell is an executive with CFO Tires. At the beginning of this year the corporation loaned Wendell $50,000 at an interest rate of1 percent. Wendell would have paid interest of $2,500 this year if the interest rate on the loan had been set at the prevailing federal interest rate. Wendell used the funds as a down payment on a vacation home, and during the year he paid $500 of interest to CFO. On December 31, CFO forgave the loan and remaining interest. What amount of gross income does Wendell recognize from the loan this year?

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Definitions:

Seasoned Equity Offering

This is when a company that has already made its initial public offering (IPO) issues additional new shares to the public.

Stock Valuation

The process of determining the intrinsic value of a stock, based on factors like dividends, earnings, economic conditions, and company performance.

Future Dividend

The dividends that a company is expected to distribute to its shareholders in the future.

Gordon Model

A method to determine the value of a stock by considering expected dividends, growth rate of these dividends, and the required rate of return.