Olivia is considering working a secretary job for a small law firm. Given the opportunity costs of working the job, she will not
1 answer:
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Answer:
P5
Explanation:
The value of the stock today is the present value of all the expected cash-flows that are likely to accrue to the investor who buys the share today. If an investor buys the share today, he is likely to receive D1, D2, D3, D4, D5 and in addition, using the going concern concept, the investor is also expected to receive all the dividends from D6 till infinity. The present value of the dividends D5 till infinity is equal to P5.
Imagine an investor who wants to buy the share at the end of year 5. He would value the share at that point by calculating the present value of all his expected cashflows, which would be the present value of D6, D7, D8 etc till infinity. Given a constant growth grate, the Gordon Growth Constant model can be used to find P5 as follows:
where D6 = D5(1+g)
therefore
Answer: d. The firm's cash position in 2015 and 2016 would increase.
Explanation:
The financila statements had been calculated with the view that fixed assets would be depreciated over a 20 year period. However, it was discovered that the assest should be depreciated over 15 years instead. This reduction in the period would have the effect for increasing the depreciation payment.
For example, say the asset cost $20,000 and was originally to be depreciated over 20 years using Straight Line Depreciation. This means that the depreciation per year would be,
=
= $1,000 a year.
If it was however discovered that it was supposed to be 15 years that figure would go to,
=
= $1,333.33 a year
Notice how depreciation increased. Lucy's Music emporium will therefore see their depreciation cost rise. Depreciation is subtracted from revenue as it is tax deductible. When Lucy's Emporium deduct this new depreciation, they will have less profit. They will be taxed on this less profit and so pay a lower tax. This will thus increase their cash holdings because Depreciation is a non cash expense and does not actually require a cash payment.