Question 8 Adams Industries has Net Income of $25,000. Adams also has a cost of equity capital of 18% and a book value of equity at the beginning of the year of $125,000. Adams can add a new division at a cost of $40,000 in new equity. The new division believes that the division will increase Net Income by $7,600. abnormal earnings be if Adams adds the new division? What will the total O $10,100 O $2,900 $2.500 Ⓒ$400

Question 8 Adams Industries has Net Income of $25,000. Adams also has a cost of equity capital of 18% and a book value of equity at the beginning of the year of $125,000. Adams can add a new division at a cost of $40,000 in new equity. The new division believes that the division will increase Net Income by $7,600. abnormal earnings be if Adams adds the new division? What will the total O $10,100 O $2,900 $2.500 Ⓒ$400

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter21: Supply Chains And Working Capital Management

Section: Chapter Questions

Problem 13P: Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth...

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Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne’s debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 12% of sales. Payne’s tax rate is 40%. What is the expected return on equity under each current asset level? In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption? Why or why not? How would the overall risk of the firm vary under each policy?
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