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Gluten-Free Baked Goods has created a niche for itself by creating and marketing a line of gluten-free cakes and desserts. The company has annual sales of $5 million. It has grown slowly but steadily; the owners have avoided all debt and have relied on internal funds to sustain growth. The firm has no debt and has generated an after-tax operating income of $400,000. The firm purchased its supplies of sugar, gluten-free flour, specialty yeasts, and other raw ingredients from a number of suppliers. Even though the owners were offered 2/10 Net/30 terms by their suppliers, they paid cash on delivery. One of the owners stated the rationale for this as follows: “We hate to owe anybody anything. Once we have the supplies and if we like the quality, we like to pay when we get the delivery. After all, our customers pay us right when they buy our product!” The cost of goods sold were 80% of the sales. The owners were recently approached by another specialty food manufacturer who wanted to buy the business for $4 million. The interested firm explained that it had simply taken the perpetuity value of the most recent after-tax operating income using a cost of capital of 12% to arrive at the value. (The analysis included a long-term growth potential of 2% per year.) The estimated value was $400,000/(0.12 − 0.02). The owners generally agreed with all the assumptions but were still a bit unsure about the value. They felt that the offer failed to reflect the conservative policies that they have been following. Do you agree with the owners? What would be your estimate of the extra value that should be offered for Gluten-Free Baked Goods?
The 6-month, 12-month. 18-month, and 24-month zero rates are 4%, 4.5%, 4.75%, and 5% with semiannual compounding. What are the rates with continuous compounding? What is the forward rate for the six-month period beginning in 18 months?
Suppose policy makers pass a budget that result in an increase in the budget deficit. Also assume that this fiscal policy action results in a reduction in the saving rate. To what extent will this reduction in the saving rate because permanent change..
Jack is single, age 65 has made a contribution of $8200 to the traditional IRA account in 2014. How much will be the excise tax in 2014 if Jack withdraws $2200 from the IRA account by the due date?
Statement of Cash Flows W.C. Cycling had $54,000 of cash at year-end 2011 and $11,000 in cash at year-end 2012. The firm invested in property, plant, and equipment totaling $130,000. Cash flow from financing activities totaled +$160,000. What was the..
You are going to withdraw $1000 at the end of each month for the next five years from a bank account that pays interest at a rate of 6% (APR) compounded monthly. How much must there be in the account today in order for the account to reduce to a bala..
You observe that states with higher income tax rates also tend to have higher rates of employer provided health insurance.- Is this a good test of the effects of tax policy on the demand for employer provided health insurance?
Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before tax cost of debt is 10%, and its tax rate is 40%. It currently has a levered beta of 1.15. The risk free are is 3.5% and the risk premium on the market is 7%..
What is the formula for determining the future value of a single sum when using the future value interest factor table?
Suppose that every time a fund manager trades stock, transaction costs such as commissions and bid–ask spreads amount to 1.9% of the value of the trade. If the portfolio turnover rate is 50%, by how much is the total return of the portfolio reduced b..
Fred was persuaded to open a credit card account and now owes $5,150 on this card. Fred is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 15.1 percent. How much longer will it take Fred..
You find a zero coupon bond with a par value of $10,000 and 22 years to maturity. The yield to maturity on this bond is 4.4 percent. Assume semiannual compounding periods. What is the price of the bond?
Your company is analyzing purchase of a machine costing $5,900 today.- The investment cost is depreciated to zero over a 3-year straight-line schedule. What is the project's NPV?
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