Which of the following two companies creates more value, assuming that they are making the same initial investment? Company A's projected profits Year Last year 1 (forthcoming year) 2 3 4 Profit (£000s) 1,000 1,000 1,100 1,200 1,400 1,600 1,800 5 6 and all subsequent years Company B's projected profits Profit (£000s) Year Last year 1 (forthcoming year) 2 3 4 5 6 and all subsequent years 1,000 1,000 1,080 1,160 1,350 1,500 1,700 Profits for both companies are 20% of sales in each year. With company A, for every £1 increase in sales 7p has to be devoted to additional debtors because of the generous credit terms granted to customers. For B, only 1p is needed for additional investment in debtors for every £1 increase in sales. Higher sales also mean greater inventory levels at each firm. This is 6p and 2p for every extra £1 in sales for A and B respectively. Apart from the debtor and inventory adjustments, the profit figures of both firms reflect their cash flows. The cost of capital for both firms is 14%. ?
Which of the following two companies creates more value, assuming that they are making the same initial investment? Company A's projected profits Year Last year 1 (forthcoming year) 2 3 4 Profit (£000s) 1,000 1,000 1,100 1,200 1,400 1,600 1,800 5 6 and all subsequent years Company B's projected profits Profit (£000s) Year Last year 1 (forthcoming year) 2 3 4 5 6 and all subsequent years 1,000 1,000 1,080 1,160 1,350 1,500 1,700 Profits for both companies are 20% of sales in each year. With company A, for every £1 increase in sales 7p has to be devoted to additional debtors because of the generous credit terms granted to customers. For B, only 1p is needed for additional investment in debtors for every £1 increase in sales. Higher sales also mean greater inventory levels at each firm. This is 6p and 2p for every extra £1 in sales for A and B respectively. Apart from the debtor and inventory adjustments, the profit figures of both firms reflect their cash flows. The cost of capital for both firms is 14%. ?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Which of the following two companies creates more value, assuming that they are making the same initial
investment?
Company A's projected profits
Year
Last year
1 (forthcoming year)
2
3
4
Profit (£000s)
1,000
1,000
1,100
1,200
1,400
1,600
1,800
5
6 and all subsequent years
Company B's projected profits
Profit (£000s)
Year
Last year
1 (forthcoming year)
2
3
4
5
6 and all subsequent years
1,000
1,000
1,080
1,160
1,350
1,500
1,700
Profits for both companies are 20% of sales in each year. With company A, for every £1 increase in sales 7p has
to be devoted to additional debtors because of the generous credit terms granted to customers. For B, only 1p is
needed for additional investment in debtors for every £1 increase in sales. Higher sales also mean greater inventory
levels at each firm. This is 6p and 2p for every extra £1 in sales for A and B respectively.
Apart from the debtor and inventory adjustments, the profit figures of both firms reflect their cash flows. The cost
of capital for both firms is 14%.
?
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