Chapter 20, Problem 1 Firm A has $10,000 in assets entirely financed with equity. Firm B also has $10,000 in assetsbut these assets are financed by $5,000 in debt (with a 10 percent rate of interest)and $5,000 in equity. Both firms sell 10,000 units of output at $2.50 per unit. The variable costs of production are $1, and fixed production costs are $12,000. (To ease the calculation, assume no income tax.)
PMT = (.1085/2)*1000=54.25 N = 60 R = 0.09/2=0.045 (or 4.5 for calculator purposes) FV = 1000 PV =? Answer: 1,190.90 b.What is the value of this bond 10 years after it was issued? PMT = (.1085/2)*1000=54.25 N = 40 R = 0.09/2=0.045 (or 4.5 for calculator purposes) FV = 1000 PV =? Answer: 1170.20 The price will decrease as approaching maturity since at maturity (just before expiration) it will be worth the par ($1,000) since this is a premium bond. 2.Suppose your company needs to raise $30 million and you want to issue 30-year bonds for this purpose.
ECO 372 FINAL EXAM 1. Consider if the government instituted a 10% income tax surcharge. In terms of the AS/AD model this change should have a. shifted the AD curve to the left b. shifted the AD curve to the right c. made the AD curve flatter d. made AD curve steeper 2. If the depreciation of a country’s currency increases it aggregate expenditures by 20, the AD curve will a. shift right by more than 20 b. shift right by less than 20 c. shift right by exactly 20 d. not shift at all 3. Suppose that consumer spending is expected to decrease in the near future.
Chapter 2. 2-14 a. Cumberland Industries' most recent sales were $455,000,000; operating costs (excluding depreciation) were equal to 85% of sales; net fixed assets were $67,000,000; depreciation amounted to 10% of net fixed assets; interest expenses were $8,550,000; the state-plus-federal corporate tax rate was 40% and Cumberland paid 25% of its net income out in dividends. Given this information, construct Cumberland's income statement. Also calculate total dividends and the addition to retained earnings. The input information required for the problem is outlined in the "Key Input Data" section below.
2. The process of identifying the bundle of projects that creates the greatest total value and allocating the available capital to the projects is known as 3. You are considering a project that has an initial cost of $1,200,000. If you take the project, it will produce net cash flows of $300,000 per year for the next six years. If the appropriate discount rate for the project is 10 percent, what is the profitability index of the project?
What does the $2.55 billion increase in Berkshire Hathaway’s market value represent? 2. Choice of valuation methods: What do you think PacifiCorp is worth on its own before its acquisition by Berkshire? Which valuation method should you use to value PacifiCorp and why? Show clearly the steps to arrive at the following estimates in Exhibit 10: Enterprise Value as Multiple of: Revenue EBIT EBITDA Net Income 6,252 8,775 9,023 7,596 6,584 9,289 9,076 7,553 MV Equity as Multiple of: EPS Book Value 4,277 5,904 4,308 5,678 Median Mean If you need to use a discount rate to discount cash flows then an appropriate discount rate estimate for PacifiCorp is approximately 9%.
$1,500,000/$12,000,000 = 0.125 or 12.5% Each dollar of revenue produces 12.5% of net income or profit. Cash flow= cash generated during the year The rough estimation of cash flow = net income + non -cash expenses, in this case, $1,500,000 + $1,500,000 = 3,000,000 C. Now, suppose the company changed its depreciation calculation procedures (still within GAAP) such that its depreciation expense doubled. How would this change affect Brandywine’s net income, total profit margin, and cash flow? Brandywine Homecare Income statement with double depreciation expense: Month ending December 31, 2007 Revenue $12,000,000 Total revenue $12,000,000 Expenses: Depreciation $ 1,500,000x2= 3,000,000 Other 12,000,000 x 75/100 = 9,000,000 Total expenses= Depreciation + Other expenses= 1,500,000x2+ 9,000,000= $12,000,000 Total revenue – total expenses = Net income or Profit - 12,000,000- 12,000,000= 0 What
For financial reporting purposes, the two most popular methods of accelerated depreciation are the declining balance method and the sum-of-the-years’ digits method. For tax purposes, the allowable methods of accelerated depreciation depend on the tax law that the taxpayer is subject to. In the United States, the two currently allowable depreciation methods for tax purposes are both accelerated depreciation methods (ACRS and MACRS). As a simple example, a company buys a generator that costs $1,000 that is expected to last for 10 years. Under the most simple form of depreciation, the company might allocate $100 of the cost of the generator to its expenses every year, until the $1000 capital expense has been "used up."
Given the following cash flow stream at the end of each year: Year 1: $4,000 Year 2: $2,000 Year 3: 0 Year 4: -$1,000 Using a 10% discount rate, the present value of this cash flow stream is: a. $4,606 b. $3,415 c. $3,636 d. Other 8. Consider a 10-year annuity that promises to pay out $10,000 per year, given this is an ordinary annuity and that an investor can earn 10% on her money, the future value of this annuity, at the end of 10 years, would be: a. $175,312 b.
c. Internal common equity where the current market price of the common stock is $43.50. The expected dividend this coming year should be $3.25, increasing thereafter at a 7% annual growth rate. The corporation’s tax rate is 34%. d. A preferred stock paying a 10% dividend on a $125 par value. If a new issue is offered, flotation costs will be 12% of the current price of $150.