Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Question
Chapter 21, Problem 17CQ
To determine
The expected cost of holding a machine.
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You are considering the purchase of a business that is currently earning $25,000 per year in after-tax profit. If these conditions are expected to continue year after year into the future, and the interest rate is currently 10 percent, the current market value of this business is a.$2,500. b.$25,000. c.$2,500,000. d.$250,000.
Bear Stationaries is thinking about expanding its facilities. In considering the expansion, Bear’s CFO has obtained the following information:
The expansion will require the company to purchase today (t = 0) $5 million of equipment. The equipment will be depreciated over the following four years at the following rate:
Year 1: 33%
Year 2: 45
Year 3: 15
Year 4: 7
The expansion will require the company to increase its net operating working capital by $500,000 today (t = 0). This net operating working capital will be recovered at the end of four years (t = 4).
The equipment is not expected to have any salvage value at the end of four years.
The company’s operating costs, excluding depreciation, are expected to be 60 percent of the company’s annual sales.
The expansion will increase the company’s dollar sales. The projected increases, all relative to current sales are:
Year 1: $3.0 million
Year 2: 3.5 million
Year 3: 4.5 million
Year 4: 4.0 million
(For example, in Year 4…
Q1. The Laundromat Corporation is considering opening another coin-operated laundry in a city. It has estimated that opening the laundry would involve an initial cost of $100,000 and would generate a net cash flow of $32,000 in each of the following five years, with no salvage value for the equipment and no recovery of operating expenses at the end of the five years. The corporation estimates that it would have to pay a rate of 12% on its bonds and that it would face a marginal income tax rate of 40%. The interest on government securities is 10%. During the current year, the corporation expects to pay a dividend of $20 on each share of its common stock, which sells for 10 times current earnings. Management and outside analysts expects the growth rate of earnings and dividends of the corporation to be 7% per year. The return on the average stock of all firms in the market is 14%, and the estimated beta coefficient () for the common stock of the corporation is 1.25. The corporation…
Chapter 21 Solutions
Economics: Private and Public Choice (MindTap Course List)
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