The Following Transactions Occurred During the Year for XYZ Corporation

question 114

Essay

The following transactions occurred during the year for XYZ Corporation:
(a.) During the year, trading securities were purchased for $250,000.
(b.) During the year, securities available for sale were purchased for $80,000.
(c.) During the year, trading securities that are carried on the balance sheet at their fair value of $125,000 were sold for $125,000 cash.
(d.) At the end of the year, the trading securities portfolio has an aggregate market value of $142,000 and an aggregate cost of $150,000.
Required:
Indicate how each of these transactions would affect the statement of cash flows for a corporation. Assume the statement of cash flows is prepared using the indirect method. Each transaction is assumed to be independent of the other transactions.

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Definitions:

SML Approach

Refers to the Security Market Line approach, a graphical representation of the Capital Asset Pricing Model (CAPM), showing the relationship between the expected return of a security and its beta (systematic risk).

Cost of Equity

The return a company needs to generate on its equity investments to compensate its shareholders for taking on the risk of investing.

After-Tax Cost of Debt

The net cost of debt to a company after accounting for the tax deductions on interest expenses.

Market Rate of Interest

The prevailing rate of interest observed in the marketplace for securities of similar risk and maturity.