The cash flow statement should not include interest expense or dividends. The return required by the investors furnishing the capital is accounted for in the 12 percent cost of capital (WACC) used to discount the cash flows, therefore including interest expense and also discounting would be "double counting." Put another way, if we both subtracted interest (and dividends) and also discounted at the cost of capital, we would in effect be deducting capital costs twice. The $150,000 test marketing cost is a sunk cost, not an incremental cash flow, so it should not be included in the analysis. Accepting or rejecting
Consequently, only suited to a direct-sale model. As such, may be more costly to market to customers iii. Relatively more vulnerable to supply chain disruptions • Benefits i. Lowers working capital needs, makes it easier to self-finance ii. Leads to beneficial cash conversion cycle iii.
The opposite occurs for a balance of payments surplus. However, the extent to which this occurs depends on the price elasticity of demand for exports and imports on the Marshall Lerner Condition. This condition states that devaluation (a fall in the value of the currency) will lead to an improvement on the current balance will be seen if the combined elasticities of demand for exports and imports are greater than 1. The size of any J-curve affect in the short run will also affect this extent. The J-curve effect is a short term
The aim of this assignment is to explore this claim in two ways. First, by example. Second, by showing that, under certain fairly general conditions, Firm 1’s profit in the second game will always be higher than their
Since the hurdle rate is usually the cost of capital, WACC for the company is calculated as below: Cost of debt 5.88% After tax 3.53% D/E 28.21% Company Beta 1.15 Cost of equity 10.95% WACC 9.3% It means that any project that will not return 9.3% will be rejected and anything above 9.3% has a good chance of being accepted. Actually the required rate of return and the systematic risk of cash flows for each project were not equal. Actually the projects with low return has a lower beta and would have a lower hurdle rate and projects with higher return have a higher beta and higher hurdle rate. The application of single hurdle rate will result in rejection of projects which return is higher than the actual hurdle rate and accept projects which return is lower than the actual hurdle rate. In other words, it would lead to false rejects for Telecom services while signaling false accepts for the Product and Systems group.
From an accounting prospective, the major problem with the calculations mentioned in the article is determining the rate of return and length of the marketing investment. While the initial value of the “investment”, i.e. marketing expense, can be easily determined, determining the real value after the investment has been made has the potential to be biased without a commonly used measurement. The value of the investment could also fluctuate from year to year based on the companies’ profitability even though marketing had not direct
In other words, the cost of raising fund is the firm’s cost of capital. Estimate a firm’s cost of capital is important because can help conclude required return for capital budgeting projects. Usually, the investor only picks up the project which provides higher return and lower risk on investments. Since the cost of capital is the minimum return required by investors, manager should invest only in projects that generate returns in excess of the cost of capital. Cost of capital can help define the acceptability of investment opportunities.
Figure [ 1 ]. A Possible Liquidity Trap (credit: Krugman). There is a grave danger, therefore, of a liquidity trap for the Eurozone. If indeed, banks do not lend to businesses (because of the expectations stated previous) and instead invest in capital markets (i.e. spending in the economy does not increase), we have some dangerous ramifications.
This is because according to Elliot (1986), it stated that historical cost assumes money holds a constant purchasing power. The specific price-level changes (shifts in customer preference and advances in technology), inflation, and fluctuation in exchange rates for currencies that happen in the modern economy cause this assumption less valid. Furthermore, historical cost does not consider the changes in price. In times of rising prices, the companies tend to overstate the profits and distribution of the profits to the shareholders will cause trouble to the company. This is because the historical cost does not
Problem Set Questions and Solutions 1. Topic 1 The Scope of Economic Analysis i. Question 1.1 “According to the definition of opportunity cost, the more alternatives that we have given up in undertaking an action, the higher the opportunity cost.” Please make a critical comment on this statement and explain your answer using examples. ii. Solution for Question 1.1 Definition of opportunity cost: The opportunity cost of an action is the value of the next-best alternative that must be given up in order to undertake that action.