Fundamentals of Financial Management, Concise Edition
9th Edition
ISBN: 9781337087544
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 1, Problem 11Q
Summary Introduction
To determine: The effect of the investment on the company’s earnings per share, intrinsic value and the price of the stock.
Introduction:
Intrinsic Value: The true value of the share which is based on the future earnings of the company determined by considering present worth and future earning that is intended for the shareholder.
Earnings per Share: Earnings per share are the monetary values of the share which dhows the profitability of the company and it is considered as that part of the profit which is distributed to number of shares outstanding
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Miguel Enterprises recently made a large investment to upgrade its technology. While these improvements won't have much effect on performance in the short run, they are expected to reduce future costs significantly. What effect will this investment have on Miguel Enterprises' earnings per share this year? What effect might this investment have on the company's intrinsic value and stock price?
Edmund Enterprises recently made a large investment to upgrade its technology. Although these improvements won’t have much effect on performance in the short run, they are expected to reduce future costs significantly. What effect will this investment have onEdmund Enterprises’ earnings per share this year? What effect might this investment have on the company’s intrinsic value and stock price?
Ezekiel Enterprises recently made a large investment to upgrade its technology. Whilethese improvements won’t have much effect on performance in the short run, they areexpected to reduce future costs significantly. What effect will this investment have onEzekiel Enterprises’ earnings per share this year? What effect might this investment haveon the company’s intrinsic value and stock price?
Chapter 1 Solutions
Fundamentals of Financial Management, Concise Edition
Ch. 1 - What is a firms intrinsic value? Its current stock...Ch. 1 - When is a stock said to be in equilibrium? Why...Ch. 1 - Prob. 3QCh. 1 - Prob. 4QCh. 1 - Prob. 5QCh. 1 - Prob. 6QCh. 1 - Should stockholder wealth maximization be thought...Ch. 1 - Prob. 8QCh. 1 - The president of Southern Semiconductor...Ch. 1 - Prob. 10Q
Knowledge Booster
Similar questions
- Edmund Corporation recently made a large investment to upgrade itstechnology. Although these improvements won’t have much of an impacton performance in the short run, they are expected to reduce future costssignificantly. What impact will this investment have on Edmund’s earningsper share this year? What impact might this investment have on thecompany’s intrinsic value and stock price?arrow_forwardIf the firm is in a very competitive, mature industry, what effect will the competitive conditions have on residual income for the firm and others in the industry? Now suppose the firm holds a competitive advantage in its industry, but the advantage is not likely to be sustainable for more than a few years. As the firm’s competitive advantage diminishes, what effect will that have on that firm’s residual income? and If a firm’s residual income for a particular year is positive, does that mean the firm was profitable? Explain. If a firm’s residual income for a particular year is negative, does that mean the firm necessarily reported a loss on the income statement? Explain. What does it mean when a firm’s residual income is zero?arrow_forwardA company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase? a. The company's profit margin increases. b. The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity. c. The company increases its dividend payout ratio. d. The company decides to stop taking discounts on purchased materials. e. The company begins to pay employees monthly rather than weekly.arrow_forward
- As part of their investment strategy, the Carringtons have decided to put $100,000 into stock market investments and also into purchasing precious metals. The performance of the investments depends on the state of the economy in the next year. In an expanding economy, it is expected that their stock market investment will outperform their investment in precious metals, whereas an economic recession will have precisely the opposite effect. Suppose the following payoff matrix gives the expected percentage increase or decrease in the value of each investment for each state of the economy. Expanding Economic economy recession Stock market investment Commodity investment 30 5 -10 20 (a) Determine the optimal investment strategy for the Carringtons' investment of $100,000. (Round your answers to the nearest dollar.) stocks $ commodities $arrow_forwardAs part of their investment strategy, the Carringtons have decided to put $100,000 into stock market investments and also into purchasing precious metals. The performance of the investments depends on the state of the economy in the next year. In an expanding economy, it is expected that their stock market investment will outperform their investment in precious metals, whereas an economic recession will have precisely the opposite effect. Suppose the following payoff matrix gives the expected percentage increase or decrease in the value of each investment for each state of the economy. Stock market investment Commodity investment Expanding Economic economy recession -10t 10 commodities 15 5 (a) Determine the optimal investment strategy for the Carringtons' investment of $100,000. (Round your answers to the nearest dollar.) stocks $ $ PRACTICE ANOTHER (b) What profit can the Carringtons expect to make on their investments over the year if they use their optimal investment strategy?…arrow_forwardThe financial manager of Company X has just received the sales forecast for next year and it indicates that the year's sales are expected to double in the second half. What are the challenges that Company X might face in increasing its production to meet the sales projections and how can these challenges be overcome? What risks does Company X face by ramping-up production to meet the sales forecast?arrow_forward
- Green Caterpillar Garden Supplies Inc. has the following end-of-year balance sheet: Green Caterpillar Garden Supplies Inc. Balance Sheet For the Year Ended on December 31 Assets Current Assets: Cash and equivalents Accounts receivable Liabilities Current Liabilities: $150,000 Accounts payable $250,000 400,000 Accrued liabilities 150,000 Inventories 350,000 Notes payable 100,000 Total Current Assets $900,000 Total Current Liabilities $500,000 Net Fixed Assets: Long-Term Bonds 1,000,000 Net plant and equipment(cost minus depreciation) $2,100,000 Total Debt $1,500,000 Common Equity Common stock 800,000 Retained earnings Total Common Equity Total Assets $3,000,000 Total Liabilities and Equity 700,000 $1,500,000 $3,000,000 The firm is currently in the process of forecasting sales, asset requirements, and required funding for the coming year. In the year that just ended, Green Caterpillar Garden Supplies Inc. generated $300,000 net income on sales of $13,500,000. The firm expects sales to…arrow_forwardplease help mearrow_forwardSuppose a company increases the price of its product and demand hardly declines.which of the following will increase? A) profit margin B) return - on - equity C) taxes D) all the abovearrow_forward
- Executives at XYZ Corporation realize that they have too much liquid assets. They want to use this cash to buy a company that has decent returns to maximize their asset utilization. They find two companies they can buy, and want to decide if they should acquire company A or Company B. The expected returns from both companies depending on the state of the economy are shown in the table below. Each state of the economy is equally likely to happen. State of the economy Return on company A(%) Return on company B (%) Worse than expected 7.3% -4.7% Expected 11.5% 5.4% Better than expected 16.6% 24.3% Calculate the expected rate of return, and standard deviation of each company. Critically evaluate the importance of the standard deviation factor in comparing investments.arrow_forwardExecutives at XYZ Corporation realize that they have too much liquid assets. They want to use this cash to buy a company that has decent returns to maximize their asset utilization. They find two companies they can buy, and want to decide if they should acquire company A or Company B. The expected returns from both companies depending on the state of the economy are shown in the table below. Each state of the economy is equally likely to happen. State of the economy Return on company A(%) Return on company B (%) Worse than expected 7.3% -4.7% Expected 11.5% 5.4% Better than expected 16.6% 24.3% Calculate the expected rate of return, and standard deviation of each company. [Note: you are supposed to show every step of your calculation and interpret the result.] Critically evaluate the importance of the standard deviation factor in comparing investments. [Note: remember to use Harvard referencing to reference your sources]arrow_forwardExecutives at XYZ Corporation realize that they have too much liquid assets. They want to use this cash to buy a company that has decent returns to maximize their asset utilization. They find two companies they can buy, and want to decide if they should acquire company A or Company B. The expected returns from both companies depending on the state of the economy are shown in the table below. Each state of the economy is equally likely to happen. State of the economy Return on company A(%) Return on company B (%) Worse than expected 7.3% -4.7% Expected 11.5% 5.4% Better than expected 16.6% 24.3% Calculate the expected rate of return, and standard deviation of each company. [Note: you are supposed to show every step of your calculation and interpret the result.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
- Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning