TEME is a manufacturer of toy construction equipment. If it pays out all of its earnings as dividends, it will have earnings of 0.3 million per quarter in perpetuity. Suppose that the discount rate, expressed as an effective annual rate (EAR), is 16%. TEME pays dividends quarterly. Suppose that TEME is considering a one- time expansion into toy xylophones. It is estimated that this will cost 1M. Assume that this cost will be incurred at the end of the year, one year from now. As a result of expansion, earnings in subsequent quarters (i.e. starting in 1 year and 1 quarter from now) would be 0.05 million higher than without the expansion. Calculate the value of TEME if it undertakes the investment.

TEME is a manufacturer of toy construction equipment. If it pays out all of its earnings as dividends, it will have earnings of 0.3 million per quarter in perpetuity. Suppose that the discount rate, expressed as an effective annual rate (EAR), is 16%. TEME pays dividends quarterly. Suppose that TEME is considering a one- time expansion into toy xylophones. It is estimated that this will cost 1M. Assume that this cost will be incurred at the end of the year, one year from now. As a result of expansion, earnings in subsequent quarters (i.e. starting in 1 year and 1 quarter from now) would be 0.05 million higher than without the expansion. Calculate the value of TEME if it undertakes the investment.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

Peng Company is considering an investment expected to generate an average net income after taxes of $1,950 for three years. The investment costs $45,000 and has an estimated $6,000 salvage value. Assume Peng requires a 15% return on its investments. Compute the net present value of this investment. (Round each present value calculation to the nearest dollar.)
Shimada Products Corporation of Japan plans to introduce a new electronic component to the market at a target selling price of $15 per unit. The company is investing $7,380,000 to purchase the equipment it needs to produce and sell 492,000 units per year. Its required rate of return on all investments is 12%. Required: Compute the component's target cost per unit. (Round your answer to 2 decimal places.) Target cost per unit
Your storage firm has been offered $98,100 in one year to store some goods for one year. Assume your costs are $96,100, payable immediately, and the cost of capital is 8.7%. Should you take the contract? The NPV will be $ (Round to the nearest cent.)
XYZ has a weighted avg cost of capital of 0.10. The firm is going to invest in a machine that will save XYZ 16 each year for the next 2 years and 19 every year after that. If the cost of the machine is 66, what would the net present value of the machine be?
Dinshaw Company is considering the purchase of a new machine. The invoice price of the machine is $58,027, freight charges are estimated to be $2,910, and installation costs are expected to be $7,320. The annual cost savings are expected to be $14,660 for 11 years. The firm requires a 21% rate of return. Ignore income taxes. What is the internal rate of return on this investment?
Roche Brothers is considering a capacity expansion of its supermarket. The landowner will build the addition to suit in return for $225,000 upon completion and a five-year lease. The increase in rent for the addition is $10,000 per month. The annual sales projected through year 5 follow. The current effective capacity is equivalent to 500,000 customers per year. Assume a 2 percent pretax profit on sales. Click the icon to view the annual sales projections. a. If Roche expands its capacity to serve 700,000 customers per year now (end of year 0), what are the projected annuall incremental pretax cash flows attributable to this expansion? The projected annual incremental pretax cash flows attributable to this expansion in year 0 are $-225,000 (Enter your response as an integer.) The projected annual incremental pretax cash flows attributable to this expansion in year 1 are $. (Enter your response as an integer.) kamp Data Table Customers Average Sales per Customer Print 560,000 600,000…
Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years, and your cash flows from the contract would be $5.05 million per year. Your upfront setup costs to be ready to produce the part would be $7.98 million. Your discount rate for this contract is 7.8%. a. What is the IRR? b. The NPV is $5.08 million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule? a. What is the IRR? The IRR is %. (Round to two decimal places.)
Suppose that the current price of titanium is $500 per oz with costless storage. The term structure is flat witha continuously compounded rate of interest of 4% for all maturities.a) Find the forward price of titanium with delivery in three months.b) Assume it costs $0.5 per oz per month to store titanium. The storage cost is payable monthly in advance.What is the new forward price? What can explain the price difference in (a) and (b)?c) Assume storage costs are as in (b) and payable monthly in advance. If the forward price is given to be$550 per oz, explain whether there is an arbitrage opportunity and how to exploit it. Use a table showingtransactions and total net cash flows at the end of each month.
Your factory has been offered a contract to produce a part for a new printer. The contract would last for 3 years and your cash flows from the contract would be $4.75 million per year. Your upfront setup costs to be ready to produce the part would be $7.91 million. Your discount rate for this contract is 7.8%. a. What is the IRR? b. The NPV is $4.38 million, which is positive, so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule?
The Borstal Company has to choose between two machines that do the same job but have different lives. The two machines have the following costs: Year Machine A Machine B $42,500 10,500 10,500 10,500 + replace $52,500 9,000 9,000 9,000 9,000 + replace 4 These costs are expressed in real terms. Suppose that technological change is expected to reduce costs by 10% per year. There will be new machines in year 1 that cost 10% less to buy and operate than A and B. In year 2, there will be a second crop of new machines incorporating a further 10% reduction, and so on. Suppose you are Borstal's financial manager. If you had to buy one or the other machine and rent it to the production manager for that machine's economic life, what annual rental payment would you have to charge at the end of the first year and how would this alter in subsequent years given the expected technological changes? Assume a 9% real discount rate and ignore E taxes. (Do not round intermediate calculations. Enter your…
Your storage firm has been offered $99,500 in one year to store some goods for one year. Assume your costs are $96,800, payable immediately, and the cost of capital is 8.9%. Should you take the contract? The NPV will be $ (Round to the nearest cent.)
A house in Melbourne has recently sold for $2.5 million. Renting an equivalent house costs $250,000 per year (paid at year-end). The risk-free rate is 7.5% (annually compounded). Suppose the house can either increase in price each year by 20% or decrease by 20% before rent is paid out (i.e. cum-dividend). For example, the price can increase from $2.5 million to $3.0 million, so that after $250,000 rent is paid out (i.e. ex- dividend), the house is worth $2.75 million. i. What is the price of a 2-year at-the money American call option on the house? State any assumptions you need to make