The answer is <u>"the company is practicing capital rationing".</u>
Capital rationing is the demonstration of setting limitations on the measure of new speculations or ventures attempted by an organization. This is practiced by forcing a greater expense of capital for venture thought or by setting a roof on explicit parts of a financial plan. Organizations might need to actualize capital apportioning in circumstances where past returns of a venture were lower than anticipated.
Capital rationing is basically an administrative way to deal with dispensing accessible assets over numerous venture openings, expanding an organization's main concern.
Answer:
a) 12.87%
b) 11.03%
Explanation:
EBIT with no debt = $111,000
net income = $111,000 x (1 - 22%) = $86,580
total value of the firm with no debt = $86,580 / 12% = $721,500
value of the firm after debt is taken = $721,500 + ($165,000 x 22%) = $757,800
debt to equity ratio after debt is taken = $165,000 / ($757,800 - $165,000) = 27.834%
new cost of equity (Re) = 12% + [(12% - 8%) x 27.834% x (1 - 22%)] = 12.87%
WACC = (0.72166 x 12.87%) + (0.27834 x 8% x 0.78) = 9.288% + 1.737% = 11.025$ = 11.03%
Answer:
Milton should buy the company
Explanation:
Comparing the intrinsic value of the company in both scenarios using the Gordon Growth Model we get:
PV = [D0 * (1 + g)] / (r - g) where
D0 is current dividend
g = growth rate
r = required rate of return
Case 1 = current
PV = 1.7 * (1 + 0.05) / (0.11 - 0.05)
PV = 29.75
Case 2 = buying company
PV = 1.7 * ( 1 + 0.065) / ( 0.12 - 0.065)
PV = 32.92
The present value of the share when buying the company is higher than the current present value, therefore Milton should go ahead buying the company.
Answer:
$45,100
Explanation:
Cash flows from operating activities:
Net income $48,000
Adjustments to reconcile net cash flows
from operating activities: ($2,900)
+ depreciation expense $3,900
- gain on sale of equipment ($4,500)
- increase in accounts receivable ($4,100)
<u>+ decrease in inventory $1,800 </u>
Net cash flow from operating activities $45,100
the gain on sale of equipment (or any other productive asset) is included in the cash flows from investing activities, that is why they must be decreased from operating activities.