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.

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.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 17P

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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 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.
Kelly expects its sales to be $20 million this year under its current credit policy. The present terms are net 30; the days dales outstanding (DSO) is 65 days; and the bad debt loss percentage is 4%. Also, Kelly’s cost of capital is 14%, and its variable costs total 62% of sales. Since Kelly wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. It is predicted that sales would increase by $600,000, and that 55 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 2 percent. (Hint, use incremental approach table) What are the incremental pre-tax profits from this proposal?
Kelly expects its sales to be $20 million this year under its current credit policy. The present terms are net 30; the days dales outstanding (DSO) is 65 days; and the bad debt loss percentage is 4%. Also, Kelly’s cost of capital is 14%, and its variable costs total 62% of sales. Since Kelly wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. It is predicted that sales would increase by $600,000, and that 55 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 2 percent. (Hint, use incremental approach table) What would be the incremental bad debt losses if the change were made? What would be the incremental cost of carrying receivables if the change were made? What are the incremental pre-tax profits from this proposal?
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