Engineering Economy, Student Value Edition (17th Edition)
17th Edition
ISBN: 9780134838137
Author: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher: PEARSON
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Chapter 13, Problem 5P
To determine
The implied
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b) Adagio Corporation has return on equity (ROE) of 20% and its plowback ratio is p. The ROE and the plowback ratio are expected to stay the same in all future periods. The company's earnings are expected to be £4 per share next year. The cost of capital is 15%. What is the present value of growth opportunities of this corporation as a function of p? Calculate the present value of its growth opportunities for p = 30%.
Hua Xing runs a lawn care service. Buying an additional riding lawn mower will cost $3,000
but would allow her firm to earn $1,000 of additional revenue each year for the next four
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accurate description of this investment opportunity?
a)
Hua Xing should make the investment because turning $3,000 into $4,000 provides a
rate of return of 33%.
b) Hua Xing should not make the investment because it has a negative net present value.
c)
Hua Xing should not make the investment because it provides only a 5.16% return on
investment.
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10%.
Conceptually, Answer for a given time period is the earnings for that period (even if not realized in cash) in excess of the opportunity cost (common equity investors'
required rate of return at the beginning of the investment period). Assume a shareholders' initial investment is $200 million, and the required rate of return on the stock is 8
percent. If the company earns $18 million in the course of a year, the company's residual income for the period is Answer .The residual income model states that a
stock's value is Answer per share plus the present value of expected future residual earnings. Because company management use allowable accounting practices to
distort how financial statements reflect economic performance, analysts Answer
a detailed knowledge of accrual accounting.
operating profit
net income
residual income
$16 million
$1.44 million
$2 million
$18 million
price
market value
book value
⠀⠀ do not need
require
Chapter 13 Solutions
Engineering Economy, Student Value Edition (17th Edition)
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