Answer:
A) a reduction of the carrying value of the investment
Explanation:
Under the equity method, the investor company cannot record dividends as revenue, it must record them as a reduction of the carrying value of their investment. Under the equity method, the value of the investment decreases with cash dividends. This transaction involves only a change between assets, investment decreases while cash increases, no additional revenue is recorded.
Cost of equity is calculated as -
Cost of equity = Risk free return + Beta * (Market risk - Risk free return)
Given,
Risk free return = 5.3 %
Market risk = 12 %
Beta = 1.05
Cost of equity = 5.3 % + (1.05*(12-5.3%))
Cost of equity = 12.335 % or 12.24 %
If the company requires a return of 10 percent for such an investment, calculate the present value of the project.
The present value of the project is $72349.51.
Since we consider only incremental cash flows for a project, we consider $21,600 for year one and calculate a 4% increase for each of the additional years.
We then calculate the Present Value Interest Factor (PVIF) at 10% for four years using the formula :
PVIF = 1 / [(1+r)^n]
Next, we find the product of the respective cash flows and PVIF for each year.
Finally, we find the total of the discounted cash flows for the four years to find the Present Value of the project.
Answer:
It will take 14 quarters (3.5 years) to reach $44,622.09 from $35,000 at an interest rate of 7% compounded quarterly.
Explanation:
Giving the following information:
PV= 35,000
FV= 44,622.09
i= 0.07/4= 0.0175
We need to calculate the number of quarters required to reach the objective. We will use the following formula:
n= ln(FV/PV) / ln(1+i)
n= ln(44,622.09/35,000) / ln(1.0175)
n= 14
It will take 14 quarters (3.5 years) to reach $44,622.09 from $35,000 at an interest rate of 7% compounded quarterly.
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