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yuradex [85]
3 years ago
7

You’re considering making an investment in a project that will generate $1,000,000 per year indefinitely. To finance this projec

t, you will be using a combination of both bonds and stocks. 60% of your financing needs will be in the form of bonds at a rate of 5%, and the remaining 40% will be issued in the form of stocks at a rate of 12%. What is the most amount of money you would consider spending for this project (to receive a return of $1,000,000 per year, indefinitely) g
Business
1 answer:
Nataliya [291]3 years ago
3 0

Answer:

The maximum that the company should consider spending on this project is $12,820,512.82

Explanation:

The project's returns are in the form of a perpetuity of $1000000 or $1 million per year. A perpetuity is a constant cash flow that occurs after equal intervals of time indefinitely.

To calculate the maximum amount that the company should consider spending on this project, we need to determine the present value of perpetuity.

The formula for present value of perpetuity is,

Present value of perpetuity = Cash Flow / Discount rate

The discount rate in this case will be the WACC of the company. The WACC or weighted average cost of capital is the cost of the company's capital structure that can contain the following components namely debt, preferred stock and common stock.

To fund this project, the company will raise 60% amount from debt financing at 5% cost of debt and 40% from common stock financing at 12% cost of common stock equity.

The WACC will be,

WACC = wD * rD  + wE * rE

Where,

  • w is the weight of each component
  • r is the cost of each component
  • D is debt and E is common stock

WACC = 0.6 * 0.05  +  0.4 * 0.12    = 0.078 or 7.8%

The present value of perpetuity discounted at 7.8% will be,

Present value of perpetuity = 1000000 / 0.078

Present value of perpetuity = $12,820,512.82

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Net working capital is defined as current assets divided by current liabilities.
Ahat [919]

Answer:

The answer is False.

Explanation:

False, because the net working capital is determined by subtracting all the current liabilities from the current assets. But in the question, it says net working capital is determined by dividing the current assets with current liabilities which is wrong. Therefore, if the current assent is 10000 dollars and current liabilities are 5000 dollars then net working capital is 10000 – 5000 = $5000.

7 0
3 years ago
Below are approximate amounts related to retained earnings reported by five companies in previous years. Coca-Cola reports an in
NemiM [27]

Answer and Explanation:

The computation is shown below:

1. Amount of dividends of Coca-Cola is

=  net income - Increase in retained earnings

= $6.9 billion - $3.2 billion

= $3.7 billion

2. Amount of net income of PepsiCo is

= Increase in retained earnings + dividend paid

= $3.4 billion + $2.6 billion

= $6 billion

3. The amount of dividends of Alphabet is

=  net income - Increase in retained earnings

= $1.6 billion - $1.6 billion

= $0 billion

4. Amount of ending retained earnings of Sirius XM Satellite is

= Beginning retained earnings - net loss - dividend

= -$1.6 billion - $1 billion - $0

= -$2.6 billion

5. The amount of beginning retained earnings of Abercro is

= Ending retained earnings - net income + dividend

= $1.56 billlion - $0.43 billion + $0.06 billion

= $1.19 billion

4 0
3 years ago
Transformational leadership is a positive predictor of job performance and organizational commitment.
Taya2010 [7]

Answer:

a. True

Explanation:

Transformational leadership can be understood as a leadership style whose main objective is the motivation of employees. The transformational leader is the one who seeks to inspire employees through their own example and willingness to work, is the leader who assertively communicates with his team, seeking the autonomy of employees, building a relationship based on trust and increasing of creativity and organizational innovation.

This leadership style is a positive indicator of organizational performance and commitment because it is based on strengthening the organizational culture, where each employee has the possibility to contribute with innovative ideas in favor of the organization's objectives and goals, which creates a sense of greater appreciation and job satisfaction, greater motivation that increases the employee's creativity and productivity.

4 0
2 years ago
Why do cell phone service firms charge more on prepaid<br>​
lubasha [3.4K]

I will give you a link from quizlet. Just wait..

4 0
3 years ago
Allison's requires $180,000 to fund a new project next year. The firm expects to earn excess cash of $68,000 this year after all
liraira [26]

$0 is needed

<u>Explanation:</u>

As per pecking order theory the risks and consequently cost increases in the order of own cash reserves, debt and then fresh equity . Since own cash reserves and debt could take care of funding requirement, so according to the pecking order theory as studied, the fresh equity needed is $0, which means there is no requirement.

Therefore, there should be no equity capital that should be raised in order to fund the project.

The correct answer is $0 equity.

4 0
3 years ago
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