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NemiM [27]
3 years ago
15

A struggling company currently has a total value of $700,000. It owes $500,000 from debt financing (assume these are loans from

the bank if you wish). The value of the company to the owners is the difference between the total value and the amount owed to the debt holders. What is the current value of the firm to the owners? Now assume that a project is presented to the owners that results in a loss of the entire value of the company with a probability of 50% and results in a gain in value of $500,000 with probability 50% (resulting in a total value of $1,200,000). Show that this in expectation decreases the firm’s value, and explain why, in spite of that, the owners of the company would want to undertake the project.
Business
1 answer:
Lynna [10]3 years ago
8 0

Answer:

What is the current value of the firm to the owners?

total value - debt = $700,000 - $500,000 = $200,000

Show that this in expectation decreases the firm’s value, and explain why, in spite of that, the owners of the company would want to undertake the project.

the expected value of the company after the new project = (50% x 0) + (50% x $1,200,000) = $600,000, so the net value of the company actually decreases by $100,000.

the issue here is that if things go wrong, the owners will lose $200,000, but if things go well, then the owners equity will increase by $500,000 to a total of $700,000. In this case, the expected value of this project for the owners = (50% x -$200,000) + (50% x $700,000) = $250,000.

I am assuming that this company is some type of corporation, LLC or LLP, not a partnership or sole proprietorship. Under current bankruptcy laws, when a cooperation goes bankrupt, the owners are not personally liable for it.

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The tennis club where you play tennis charges $50.00 per month and $10.00 per hour of court time. If your current month's bill i
leonid [27]

Answer:

5 hours

Explanation:

Data provided in the question

Per month tennis charges = $50

Court time per hour = $10

Current month bill = $100

By considering the above information we can find out the variable expense that is shown below:

= Current month bill - per month tennis charges

= $100 - $50

= $50

So, the number of court time hours usage is

= $50 ÷ $10

= 5 hours

7 0
3 years ago
Ivanhoe Diesel owns the Fredonia Barber Shop. He employs 5 barbers and pays each a base rate of $1,380 per month. One of the bar
ANTONII [103]

Answer:

Fredonia Barber Shop

a. Variable costs per haircut = $4.40

   Total monthly fixed costs = $8,910

b. Break-even point in units = 1,350

Break-even point in sales dollars = $14,850

Net income with 1,670 haircuts = $2,120

Explanation:

a) Data and Calculations:

Fixed costs:

Wages of barbers per month =    $6,900 ($1,380 * 5)

Manager's allowance per month = $535

Advertising per month =                 $270

Rent per month =                           $1,010

Utilities per month =                        $160

Magazines per month =                   $35

Total fixed costs per month =     $8,910

Ivanhoe currently charges $11 per haircut.

Variable costs per haircut:

Commission per haircut =       $3.75

Barber supplies per haircut = $0.50

Utilities per haircut =                $0.15

Total variable costs per unit   $4.40

Contribution margin per haircut = $6.60 ($11 - $4.40)

Contribution margin ratio = 0.6

Break-even point in units = $8,910/$6.60 = 1,350

Break-even point in sales dollars = $8,910/0.6 = $14,850

Net income assuming 1,670 haircuts for a month:

Sales revenue = $18,370 ($11 * 1,670)

Variable costs =     7,340 ($4.40 * 1,670)

Contribution       $11,030

Fixed costs            8,910

Net income         $2,120

8 0
3 years ago
Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)a. If the market risk premium incre
podryga [215]

Answer:

E. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.

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adoni [48]

Answer:

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So, the vendors of the enterprise application establish a e-business suites in order to make their own relationship with the customer relationship and the supply chain management.

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Suppose you invest 60% of your portfolio in campbell soup and 40% in boeing. the expected dollar return on your campbell soup st
DiKsa [7]
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