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DedPeter [7]
3 years ago
10

The valuation of the cat food business is based on cash flows of $180,500 per year over a five year period. The target business

has the same risk as the firm’s overall operations. The cost of equity is 15 percent and the cost of debt is 3 percent on an after-tax basis. The firm’s capital structure consists of 10 million in equity and 8 million in debt.
What is the most the pet-food manufacturer should pay for acquiring the cat food business per its required return (WACC)?
Business
1 answer:
mezya [45]3 years ago
4 0

Answer: $690,044

Explanation:

First calculate WACC.

Total capital = 10 + 8 = $18 million

WACC = (Weight of debt * after-tax cost of debt) + (weight of equity * cost of equity)

= (8/18 * 3%) + (10/18 * 15%)

= 9.67%

Using the WACC, find the present value of the cashflows for the next 5 years. This will be an annuity.

= 180,500 * (1 - (1 + r) ^-n)/r

= 180,500 * ( 1 - ( 1 + 9.67%) ^ -5)/9.67%

= $690,044.67

= $690,044

They should pay no more than this present value.

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Answer and Explanation:

The computation of the present values of both alternatives is shown below:

For alternative one, the lump sum amount is

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= $50,000 × 7.5361

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And, in the alternative 2, the lumpsum amount i.e. present value is $452,000

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5 0
3 years ago
Nathan’s Athletic Apparel has 2,000 shares of 5%, $100 par value preferred stock the company issued at the beginning of 2017. Al
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Answer and Explanation:

The computation is shown below:-

Particulars                                   Cumulative       Non Cumulative

Preferred dividends for 2018       $10,000              $10,000

Preferred dividend in

arrears for 2017                              $10,000               $0

Remaining Dividends to

Common stockholders                    $2,000             $12,000

Total Dividends                               $22,000           $22,000

Dividend payable to Preferred stockholders per year = (Number of shares × Par value) × Given percentage

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= $10,000

6 0
2 years ago
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5 0
3 years ago
Seth is mentally incompetent but has not been adjudged by a court to be incompetent. Seth enters into a contract with Toby for t
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Answer:

Void

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Void is the term of law, which is defined as the contract is not valid currently, and the parties of the contract are not held to its terms. The void contract is the one which is generally unenforceable.

The contract could be void because of many reasons like the contract need one party to perform that act which is impossible or in that case, where one party is not mentally incompetent.

So, in this case, the contract is most likely to be void as the contract with the party who is mentally incompetent, though the party has not been adjudged through court.

6 0
3 years ago
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Mariulka [41]

Answer:

The correct answer is option D.

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