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
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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 1 M. 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.
*Make sure to input the answer without any
currency symbols, commas, and remove M
as Million value.
e.g. 6,000,000 = 6M, so the answer should be
written as 6
Transcribed Image Text: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 1 M. 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. *Make sure to input the answer without any currency symbols, commas, and remove M as Million value. e.g. 6,000,000 = 6M, so the answer should be written as 6
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