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yuradex [85]
2 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]2 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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Explanation:

There are certain necessary conditions required for a market to operate as a monopoly. These conditions are not generally met in the real world. This is the reason why monopolies are very rare not so common in the real world.  

A monopoly is a market structure where there is a single producer selling a product with no close substitutes. In the real world, almost all products have substitutes.  

Also for a monopoly to operate there should be a restriction on entry and exit of firms which is difficult to hold in the real world.

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A corporation issued 5,000 shares of its no par common stock that was assigned a $1 stated value per share. The issue price was
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Answer:

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Credit Ordinary share $5,000

Credit Share Premium $45,000

Explanation:

When share issued are paid for at an amount above the par or ordinary value, the excess paid is known as share premium.

The share premium like the par or ordinary value is recognized in the balance sheet as a part of the owners equity.

For a stock unit at par value of $1 for which the issue price was $10,

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Answer and Explanation:

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