BUSINESS COLLEGE

Sommer, Inc., is considering a project that will result in initial aftertax cash savings of $1.75 million at the end of the first year, and these savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debt-equity ratio of .80, a cost of equity of 11.5 percent, and an aftertax cost of debt of 4.3 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of 3 percent to the cost of capital for such risky projects.

Answers

Answer 1

Answer:

Answer:

The question is: "What is the maximum initial cost the company would be willing to pay for the project?"

The maximum initial investment cost the company would be willing to pay for the project is $18,817,204.

Explanation:

We have D/E = 0.8 => D/ (D+E) = 4/9; E/(D+E) = 5/9.

WACC of the firm = 4/9 x 4.3% + 5/9 x 11.5% = 8.3%.

Adjustment for cost capital due to higher risk of the project: 8.3% + 3% = 11.3%.

=> Maximum initial investment cost is equal to the net present value of the cash saving the project brings about discounting at project's cost of capital, calculated as:

1,750,000/ (11.3% - 2%) = $18,817,204.

Thus, the Maximum initial investment cost is $18,817,204.

Related Questions

Compute the missing amounts. (Enter the contribution margin ratio to nearest percent, X%.)A B CSales price per unit $200 $4,000 $5,220 Variable costs per unit 80 1,000 2,088Total fixed costs 73,200 660,000 3,758,400Target profit 266,760 3,000,000 3,132,000Calculate: Contribution margin per unit Contribution margin ratio Required units to break even Required sales dollars to break even Required units to achieve target profit
Which of the following you should use if you expect the probability for an increase in pound value is greatee than that for decrease
Harriet's Wimsey is a bookstore for people who love mysteries. How would a complete set of P. D. James mystery novels, a first edition copy of The Maltese Falcon, the money in the cash register, and an IOU from a loyal customer who forgot her wallet one day when she came to purchase the newest Dorothy Cannell book be listed on the store's balance sheetA. as owners' equity B. as current liabilities C. as fixed assetsD. as long-term liabilities E. as current assets
Chrissie's Cooking Supply Company has 5,000 skillets in their warehouse at the end of July. One quarter of these skillets were held over from the month of June at a cost of $12 per skillet. The remaining skillets were purchased in July at a cost of $15 per skillet. At the beginning of August they received another 2,000 skillets at a cost of $17 per skillet. The warehouse sold and shipped 2,198 skillets during August. Chrissie's Cooking Supply Company uses LIFO to value their inventory. What would be the remaining balance of skillets in the inventory account at the end of August?
On July 1, a company receives an invoice for $800 with the terms 1/10, net 30. On July 15, the payment should be $692 $790 $792 $800 $808

Your order is supposed to be delivered between 5PM-6PM, and it’s now 5:45PM. You’re stuck in a long line waiting to check out. In this situation, you will be late delivering the order. Provide an example of the text message you would send to the member.

Answers

Explanation:

If I am stuck in a long line waiting to check out and I was supposed to deliver the parcel between 5 PM to 6 PM, then I will text the receiver telling him about my problem and tell him that his order will be delivered late and will give him a time boundary. My text message to him will look like the following:

Hi Sir/Madam,

This is abc from xyz company. Your parcel was scheduled to deliver between 5 PM to 6 PM, but due to some uncertain situation, there is a short delay in the delivery. Your parcel is hoped to deliver within the next one hour.

Your patience will be highly appreciated, and apologies for the delay.

Best Regards.

A sample of the text message sent to apologize for the delay would look like this:

This is ABC from XYZ company. Your parcel was scheduled to deliver between 5 PM to 6 PM, but due to some unforeseen delays, we would deliver within the next hour.

Your patience will be highly appreciated, and apologies for the delay.

What is an Apology?

This is a statement that shows that a person is sorry for the action and would want to rectify the situation.

Hence, we can see that based on the hypothetical situation about sending a parcel and not delivering on time, an apology text needs to be sent and it is shown above.

Answers

Answer:

Explanation:

Monetary policy tightening decreases money supply and increases interest rate. Higher interest rate lowers investment, which will decrease aggregate demand. AD curve will shift to left, decreasing both price level and real GDP, giving rise to a recessionary gap in short run. Inflation will decrease and unemployment will increase.

In the long run, lower price level will decrease wages and prices of inputs, decreasing production costs. Firms will increase production, increasing aggregate supply. SRAS shifts rightward, intersecting new AD curve at further lower price level but restoring real GDP to potential GDP GDP.

When aggregate demand falls, AD curve will shift leftward from AD0 to AD1, intersecting SRAS0 at point B with lower price level P1 and lower real output Y1, with short run recessionary gap of (Y0 - Y1). In long run, SRAS0 shifts right to SRAS1, intersecting AD1 at point C with further lower price level P2 and restoring real GDP to potential GDP level Y0. Inflation will decrease and unemployment will decrease & restore to initial (full employment) level.

Colter Steel has $5,600,000 in assets. Temporary current assets $ 3,200,000 Permanent current assets 1,610,000 Fixed assets 790,000 Total assets $ 5,600,000 Short-term rates are 10 percent. Long-term rates are 15 percent. Earnings before interest and taxes are $1,180,000. The tax rate is 20 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be

Answers

Answer:

The Earnings after taxes will be $400,000

Explanation:

According to the data we have the following Long term financing funds of Permanent current assets = $1,610,000 and Fixed assets = $790,000 so the total of Long term financing funds= $ 2,400,000

Also, we have Termperory current assets = $3,200,000

Therefore, the Long term interest expenses = $2,400,000 * 15%

= $360,000

and the Short term interest expenses = $3,200,000* 10%

= $ 320,000

Hence, Total interest expenses=$360,000+$ 320,000=$680,000

So, Earnings before taxes=Earnings before interest and taxes-Interest expenses=$ 1,180,000- $ 680,000=$500,000

The tax rate is 20 percent, hence, taxes=$500,000*20%=$100,000

Therefore, The Earnings after taxes would be=Earnings before taxes-taxes

=$500,000-$100,000

=$400,000

The best way to investigate fraudulent transactions on your credit card is to:

Answers

you can check on your account online or when you get your statement it will have all the charges from that billing period.

Sue spent much of her time checking inventories, processing straight rebuys, setting up displays and making sure everything is going smoothly. Sue was primarily a(n):__________ A. business development specialist
B. caretaker rep
C. order getter
D. order taker
E. sale support personnel

Answers

Answer:

(D) order taker.

Explanation:

An order taker is a salesperson who collects orders checks inventories, processes straight rebuys, sets up displays but does not make any effort to invite new customers or persuade the existing ones to increase their quantities of purchase.

Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession.Instructions: In part a, round your answers to 2 decimal places. Enter your answers as positive numbers. In part b, enter your answers as whole numbers.

a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $30 billion?

How large a tax cut would be needed to achieve the same increase in aggregate demand?

b. Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt.

Increase spending

Increase taxes by

Answers

Answer:

a.i $6B

ii. The government should decrease taxes by $7.5B to achieve $30B increase in the level of output.

b. Possible combination:

Increase government spending by $30B.

Decrease taxes by $30B.

Explanation:

Fiscal policy is a way by which a government adjusts its spending levels and tax rates to predict and influence a nation's economy. It is synonymous to monetary policy through which a central bank influences a nation's money supply into the economy. Fiscal policy is divided into two types namely:expansionary or contractionary fiscal policies.

. Government spending multiplier is a direct increase in the level of output (GDP) as a result of one dollar change in government spending.

By how much would government spending have to rise to shift the aggregate demand curve rightward by $30 billion?

Government spending multiplier:

To calculate government spending multiplier (Kg) using MPC:

(1-0.8)*30B

=$6B

The government should increase its spending by $6B in order to archives $30B increase in the level of output.

Tax Multiplier:

Calculate tax multiplier (Kt) by using MPC:

The government should decrease taxes by $7.5B to achieve $30B increase in the level of output.

b) Possible combination:

Increase government spending by $30B.

Decrease taxes by $30B.

Other Questions

Suppose a foreign investor who holds tax-exempt Eurobonds paying 10.50% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 10.50% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return

A pollution haven is A. unattractive for multinational investment because of the ambient pollution. B. a location with weak environmental rules that attracts manufacturing companies due to decreased costs. C. a place that has very low worker wages. D. a place where people actually like pollution and view it as a positive externality.

) A homeowner is considering putting solar panels on the roof of his house. The installed cost of putting 3 kW of solar panels is $6000 and the panels come with a 25 year guarantee. The panels would be able to meet the average monthly electrical consumption of 850 kW-hrs for the house. a) If the homeowner has the $6000 available for the project, what would the cost of electricity from the power company need to be greater than ($/kW-hr) to make the project viable if other investments are providing 8% interest. ($0.0545/kW-hr) b) If the homeowner had to borrow the $6000 from the bank at 5% interest for 10 years (monthly payments) what would the cost of electricity need to be greater than in $/kWhr from the power company to make the project viable if other investments are providing 8% interest. ($0.0476/kW-hr)

An annuity that goes on indefinitely is called a perpetuity. The payments of a perpetuity constitute a/an series. The equation is: A stock with no maturity is an example of a perpetuity. Quantitative Problem: You own a security that provides an annual dividend of $115 forever. The security’s annual return is 5%. What is the present value of this security? Round your answer to the nearest cent. $