CORPORATE FINANCE - CONNECT ACCESS
CORPORATE FINANCE - CONNECT ACCESS
12th Edition
ISBN: 9781264054893
Author: Ross
Publisher: MCG
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Chapter 1, Problem 3CQ
Summary Introduction

To evaluate the statement:

The managers must not concentrate on the present stock value because doing so will lead to an over emphasis on short-term profits at the expenses of long-term profits.

Introduction:

Any profits that arise during a course of time, that is, less than twelve months, are considered short-term profits or gains. Any profits that arise during a course, that is, more than 12 months, are considered long-term profits or gains.

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You are considering an option to purchase or rent a single residential property. You can rent it for $5,000 per month and the owner would be responsible for maintenance, property insurance, and property taxes. Alternatively, you can purchase this property for $204,500 and finance it with an 80 percent mortgage loan at 4 percent interest that will fully amortize over a 30-year period. The loan can be prepaid at any time with no penalty. You have done research in the market area and found that (1) properties have historically appreciated at an annual rate of 2 percent per year, and rents on similar properties have also increased at 2 percent annually; (2) maintenance and insurance are currently $1,545.00 each per year and they have been increasing at a rate of 3 percent per year; (3) you are in a 24 percent marginal tax rate and plan to occupy the property as your principal residence for at least four years; (4) the capital gains exclusion would apply when you sell the property; (5)…
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