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uysha [10]
3 years ago
12

Hankins, Inc., is considering a project that will result in initial aftertax cash savings of $6.3 million at the end of the firs

t year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .62, a cost of equity of 13.2 percent, and an aftertax cost of debt of 5.7 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of 2 percent to the cost of capital for such risky projects. a.Calculate the required return for the project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)b.What is the maximum cost the company would be willing to pay for this project
Business
1 answer:
Marrrta [24]3 years ago
8 0

Answer:

A. 12.3%

B. 68%

Explanation:

a.Calculation to determine the required return for the project

Required return=(0.62/1.62*5.7%)+(1/1.62*13.2%)+2%

Required return=0.022+0.081+2%

Required return=0.124*100

Required return=12.3%

Therefore the required return for the project will be 12.3%

b. Calculation to determine the maximum cost the company would be willing to pay for this project

Maximum cost =6.3/(12.3%-3%)

Maximum cost =6.3/9.3%

Maximum cost =0.67.7*100

Maximum cost =67.7%

Maximum cost=68% (Approximately)

Therefore the maximum cost the company would be willing to pay for this project will be 68%

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The most recent financial statements for Bello Co. are shown here: Income Statement Balance Sheet Sales $ 20,700 Current assets
givi [52]

Question : What is sustainable growth Rate

Answer:

Sustainable growth Rate = 1.69 %

Explanation:

Sustainable growth Rate = Return on Equity x Retention Rate

Where Return on Equity = Asset Utilization Rate x Profitability Rate x Financial Utilization Rate

Asset Utilization Rate= Total Sales/Total Assets

                                   = 20,700/46,260 = 0.45

Profitability Rate = Net Income/ Total Assets

                           = 4,940/46,260 = 0.11

Financial Utilization Rate = total debt/ Total equity

                                          = 16,780/ 29,480 = 0.57

Return on Equity = 0.45 x 0.11 x 0.57

                             =0.028

Retention Rate = 1- dividend pay out ratio

                         = 1-0.40

                         = 0.60

Sustainable growth Rate = 0.028 x 0.60

                                           = 1.69 %

6 0
4 years ago
You are considering buying a perpetuity contract from your insurance company that will pay you $500 annually where the payment w
miss Akunina [59]

Answer:

Maximum Amount Payable = $8333.33

Explanation:

Perpetual Annuity Payment = $500

Growth Rate = 3%

Discount Rate = 9%

Maximum Amount Payable = Present Value of Perpetual Annuity

Present Value of Perpetual Annuity =  Perpetual Annuity Payment / (Discount rate - Growth rate)

Maximum Amount Payable = $500 / (0.09 - 0.03)

Maximum Amount Payable = $500 / 0.06

Maximum Amount Payable = $8333.33

3 0
3 years ago
Government survey takers determine that typical family expenditures each month in the year designated as the base year are as fo
Alex17521 [72]

Answer:

  • <u><em>1. CPI in the subsequent year: 1,135</em></u>

<u><em></em></u>

  • <u><em>2. Rate of inflation: 13.5%</em></u>

<u><em></em></u>

Explanation:

<u>1. Calculate the CPI</u>

<em></em>

<em>CPI </em>is the consumer price index.

CPI is created using a basket of goods and services that are typically consumed.

In the given case the typical basket is:

  • 25 pizzas
  • Rent of apartment
  • Gasoline and car maintenance
  • Phone service (basic service plus 10 long-distance calls).

Then to find the CPI for a determined year you multiply each item by its price and then add up all the results.

For the base year, the expenditures per month were:

  • 25 pizzas at $ 10: $10 × 25 = $250
  • Rent of apartment:  $600
  • Gasoline and car maintenance: $100
  • Phone service (basic service plus 10 long-distance calls): $50

Then, the CPI for the base year is:

  • CPI = $250 + $600 + $100 + $50 = $1,000

The year following the base year, the expenditures per month are:

  • 25 pizzas at $ 11 : $11 × 25 = $275
  • Rent of apartment:  $700
  • Gasoline and car maintenance: $120
  • Phone service (basic service plus 10 long-distance calls): $40

Then the CPI for the followng year is:

  • CPI = $275 + $700 + $120 + $40 = $1,135

<u>2. Calculate the rate of inflation</u>

The rate of<em> inflation</em> is defined as the increase of the CPI of the given year with respect ot the base year:

The formula to calculate the rate of inflation is:

  • Inflation = (CPI of the year - CPI of the base year) / (CPF of the base year) × 100

  • Inflation = [ (1,135 - 1,000) / (1,000)]  × 100 = 13.5%

Hence, <em>the rate of inflation for the subsequent year is 13.5%</em>

7 0
3 years ago
If the spending multiplier equals 5 and equilibrium income is $2 billion below potential GDP, then _____ to reach the potential
rosijanka [135]

Answer:

total spending needs to increase by $0.4 billion

Explanation:

Calculation to determine how much total spending needs to increase or decrease

Using this formula

Increase or Decrease in total spending=Equilibrium income/Spending multiplier

Let plug in the formula

Increase or Decrease in total spending=$2 billion/5

Increase or Decrease in total spending=$0.4 billion

Therefore If the spending multiplier equals 5 and equilibrium income is $2 billion below potential GDP, then TOTAL SPENDING NEEDS TO INCREASE BY $0.4 BILLION to reach the potential real GDP level.

3 0
3 years ago
A company opting to boost its sales of branded footwear by offering buyers 500 models/styles to choose from should consider redu
Pavel [41]

Answer:

D. investing in production improvement option B at those production facility locations producing 500 models.

4 0
4 years ago
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