Solution 1:

Business Entity Concept- According to business entity concept there is an entity between
business and owner. Both are considered separate while making books of accounts. The main
purpose is not to mix personal affairs with business affairs in order to know the true profitability
of the business.

Money measurement concept- According to this concept only monetary (pecuniary)

transactions are recorded in books of accounts, non monetary transactions are not recorded in
books of accounts.

Going concern concept- According to this concept it is assumed that business will continue for
an indefinite period of time. Under this concept one can make distinction between the

expenditures that provide short term benefit and the expenditure that provide long
term benefit(add example here).

Accounting period concept- According to this concept the longevity of business is divided into
annual intervals .There are two accounting periods

Calendar year = 1st January – 31st December

Financial year = 1stApril – 31st march next year

Cost concept- According to cost concept transactions are recorded in books of accounts at
actual amount involved not more not less.

For example: Purchase of building worth $ 200,000 but the market value is 400,000.The
transaction would be recorded at $ 200,000

Solution 2:

Asset: Asset means any expenditure resulting into acquisition of some property.There are five types of
assets.

1. Fixed Assets – Fixed assets are those assets that are not for resale purpose like land, Building,
Machinery etc.
2. Current Assets- Current assets are those assets that can be converted into cash within a period of a
twelve (12) months, for example cash, inventory, debtors.

3 Intangible assets- are those assets which can not be seen or touch for example goodwill.

4. Fictitious assets – are those assets which have no resalable value for example preliminary expenses.

5. Wasting assets- which will ultimately loose their value because of use for example mines & oil wells

Solution 3:

Kd - Cost of Long-term debt (before tax) 8.576%

Ki - Cost of Long-term debt (after-tax) 6.175%

Kp - Cost of Preferred stock 8.435%

Kp - Cost of Common stock 14.750%

Kp - Cost of Retained Earnings 13.609%

b (1) Breaking Point (BP) 200,000

b (II)

Type of Capital Target capital structure Cost of Capital Weighted Cost

WACC equals to or below
$200,000
-Long term debt 0.30 6.168% 1.850%
-Preferred Stock 0.20 8.44% 1.688%
-Common Stock 0.50 13.692% 6.846%
10.384%

b(III)

Type of Capital Target capital structure Cost of Capital Weighted Cost

WACC equals to or below
$200,000
-Long term debt 0.30 6.168% 1.850%
-Preferred Stock 0.20 8.44% 1.688%
-Common Stock 0.50 14.86% 7.430%
10.969%