1. Assume that $1,000 is to be received 30 years from today. Compare the present values obtained using 0.05 and 0.20 as rates of discount. 2. The ABC Company has opened 10 new stores. It has incurred a great deal of expenses associated with opening the stores, and the stores have not yet built up enough clientele to be profitable. On the other hand, the stores are operating at profit levels exceeding expectations, and there are indications that they will be very profitable in the future. It is obvious that the stock market has not yet digested this latter fact, and the additional 50 stores this year, but to do so will require new stockholder capital acquired from the market (it has borrowed all it feels it is prudent to borrow and cannot obtain more capital from its current stockholders). Without the new capital, the stockholders can expect to earn an equivalent annual return of 0.15 on the current market value of their investment (assume there is $100 million or 1 million shares of stock outstanding). The stock is currently selling at $100 per share and paying $6 per share dividend. The earnings are $7.50 per share ($7.5 million in total). The new investments would require $10 million to be obtained by issuing 100,000 new shares of common stock. The investment would return $1.2 million per year available for dividends for perpetuity. The stockholders desire a 0.08 return per year on their incremental investments. a. Should the corporation issue the new shares and undertake the investment? b. What would be your recommendation if the corporation had the necessary cash already available? 3. (Continuation of problem 2) Change the statement of the problem so that the present stockholders can expect to earn dividends of S6 per share or an equivalent annual return of 0.06 for perpetuity, unless the new investment is undertaken. Should the new investment be undertaken? 4. (Continuation of problem 2) Change the statement of the problem so that the present stockholders can expect to earn S8 million, or an equivalent return of 0.08 per year on the current market value of their investment, if the new investment is not undertaken. Should the new investment be undertaken? 5. The following facts apply to the DEF Company: Cost of short-term loans = 0.05 Cost of long-term loans = 0.06 Cost of common stock capital = 0.10 Item Current liabilities (non-interest-bearing) Short-term loans (interest-bearing) Accumulated depreciation Long-term debt Common stock Book value $10,000,000 5,000,000 50,000,000 20,000,000 Market value $10,000,000 5,000,000 Not applicable 20,000,000 75.000.000 25.000.000 a. Compute the average cost of capital. Assume the corporate income tax rate is 0.4. b. Assume that as a result of a decrease in the income tax rate to 0.3, the market value of the common stock rises to $100 million v a

1. Assume that $1,000 is to be received 30 years from today. Compare the present values obtained using 0.05 and 0.20 as rates of discount. 2. The ABC Company has opened 10 new stores. It has incurred a great deal of expenses associated with opening the stores, and the stores have not yet built up enough clientele to be profitable. On the other hand, the stores are operating at profit levels exceeding expectations, and there are indications that they will be very profitable in the future. It is obvious that the stock market has not yet digested this latter fact, and the additional 50 stores this year, but to do so will require new stockholder capital acquired from the market (it has borrowed all it feels it is prudent to borrow and cannot obtain more capital from its current stockholders). Without the new capital, the stockholders can expect to earn an equivalent annual return of 0.15 on the current market value of their investment (assume there is $100 million or 1 million shares of stock outstanding). The stock is currently selling at $100 per share and paying $6 per share dividend. The earnings are $7.50 per share ($7.5 million in total). The new investments would require $10 million to be obtained by issuing 100,000 new shares of common stock. The investment would return $1.2 million per year available for dividends for perpetuity. The stockholders desire a 0.08 return per year on their incremental investments. a. Should the corporation issue the new shares and undertake the investment? b. What would be your recommendation if the corporation had the necessary cash already available? 3. (Continuation of problem 2) Change the statement of the problem so that the present stockholders can expect to earn dividends of S6 per share or an equivalent annual return of 0.06 for perpetuity, unless the new investment is undertaken. Should the new investment be undertaken? 4. (Continuation of problem 2) Change the statement of the problem so that the present stockholders can expect to earn S8 million, or an equivalent return of 0.08 per year on the current market value of their investment, if the new investment is not undertaken. Should the new investment be undertaken? 5. The following facts apply to the DEF Company: Cost of short-term loans = 0.05 Cost of long-term loans = 0.06 Cost of common stock capital = 0.10 Item Current liabilities (non-interest-bearing) Short-term loans (interest-bearing) Accumulated depreciation Long-term debt Common stock Book value $10,000,000 5,000,000 50,000,000 20,000,000 Market value $10,000,000 5,000,000 Not applicable 20,000,000 75.000.000 25.000.000 a. Compute the average cost of capital. Assume the corporate income tax rate is 0.4. b. Assume that as a result of a decrease in the income tax rate to 0.3, the market value of the common stock rises to $100 million v a

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 12P

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