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Svetach [21]
3 years ago
14

Luther Industries has no debt and expects to generate free cash flows of $48 million each year. Luther believes that if it perma

nently increases its level of debt to $100 million, the risk of financial distress may cause it to lose some customers and receive less favorable terms from its suppliers. As a result, Luther's expected free cash flows with debt will be only $44 million per year. Suppose Luther's tax rate is 40%, the risk-free rate is 6%, the expected return of the market is 14%, and the beta of Luther's free cash flows is 1.25 (with or without leverage). The value of Luther with leverage is closest to:_______.
A) 11.5%.
B) 10.8%.
C) 9.8%.
D) 13.0%.
Business
1 answer:
Butoxors [25]3 years ago
3 0

Answer: $315 million

Explanation:

First find the cost of capital as a required rate of return using CAPM:

= Risk free rate + Beta * (Market return - Risk free rate)

= 6% + 1.25 *(14% - 6%)

= 16%

Value of Luther with leverage:

= (Cash flows with debt / required return) + (Debt * Tax)

= (44 million / 16%) + (100 million * 40%)

= $315 million

<em>Options do not represent value. </em>

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3 years ago
What is supply-side fiscal polioy? Identify each policy action as being focused on the demand side, the supply side, or both. Dr
Advocard [28]

Answer: Please refer to Explanation

Explanation:

Supply Side Fiscal Policy focuses on how to improve the ability of companies to supply more goods to the economy. The aim being that as companies supply more, they grow more and employ more people.

Demand Side Fiscal Policy on the other hand focuses on how to give more power to the Demand side of the Economy. It holds that increasing demand leads to increased supply which is good for the economy.

Classifying the above,

1. research grants for a corporation developing new technologies. SUPPLY SIDE.

This is aimed at increasing supply by improving the ways a company is able to produce it's goods and services.

2. government-funded scholarships for college students. SUPPLY SIDE.

This is supply side because it leads to more Colleges offering placement to students.

3. stimulus packages for firms that are "too big to fail". DEMAND SIDE.

Companies considered Too big to fail usually hire a lot of people. Keeping them running leads to them being able to pay off their employees which increases the demand in the economy.

4. increasing spending on "shovel-ready" projects. DEMAND SIDE.

Shovel Ready projects are those that are ready to be initiated. By increasing spending on them, they hire people immediately and begin work which increases the income flowing to people in the economy which increases demand.

5. lowering income tax rates at all income levels. BOTH.

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8 0
3 years ago
When I called about the cost of theses items it was implied total would only be 35.00
elixir [45]

Answer:

plus tax

Explanation:

7 0
3 years ago
Ed's Print Shop received an invoice dated May 10 for $2,500 with terms 3/10, 1/15, n/60. On May 22, Ed's Print Shop sent a parti
artcher [175]

Amount to be credited = $2,020

Outstanding balance = $480

Explanation:

The payment terms state that

  • 3% discount may be taken within 10 days of the invoice date (up to May 20); or  
  • 1% discount may be taken within 15 days of the invoice date (after May 20 but not later than May 25); or
  • The net amount is due within 60 days of the invoice date if advantage is not taken of the cash discounts offered.
  • The  3% cash discount is not applicable as the payment was made on May 22 which is after the end of the discount period. However, the 1% discount is allowed, since payment on May 22 is within the 15-day period for the 1% discount.

Amount to be credited

= 2000 / (1−0.01)

= 2000 / (0.99)

= $2,020

Outstanding balance

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3 0
3 years ago
According to economists Alchian and Demsetz, firms are formed when
ycow [4]

Answer:A

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3 0
2 years ago
Read 2 more answers
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