Reference no: EM132020088
Susan Jones has a job as a pharmacist earning $45,000 per year, and she is deciding whether to take another job as the manager of another pharmacy for $55,000 per year or to purchase a pharmacy that generates revenue of $250,000 per year.
To purchase the pharmacy, Susan would have to use her $20,000 savings and borrow another $90,000 at an interest rate of 8 percent per year.
The pharmacy that Susan is contemplating purchasing has additional expenses of $100,000 for prescription non-prescription drugs and lines of women's and men's personal hygiene products and cosmetics, $45,000 for one full time person and $20,000 for one part time person, $12,000 for rent and $2500 for electricity and $1300 for natural gas, $1200 for telecommunications and . Depreciation and amortization expenses are $5500.
Assume that income and business taxes are 35% and the repayment of the principal of the loan does not start before three years.
Also assume that revenue is expected to grow at 5% per year and expenses at 3% per year over the three years.
(a) What would be the business and economic profit if Susan purchases the pharmacy?
(b) Suppose that Susan expects to sell the pharmacy at the end of three years for $50,000 more than the price she paid for it and that she requires a 12 percent return on his investment. Should she still purchase the pharmacy?
Steps: (please answer all the question including 3,4,5,6)
1. Build a pro forma (forecasted) income statement for 2011, 2012, and 2013 from an accounting approach and determine the expected profit.
2. Build a pro forma (forecasted) income from a economic approach for the same period and determine the expected EVA.
3. Determine the net present value of the stream of profits, i.e., discounted profits in year 1, year 2, year 3 less the cost of the deal.
4. Suppose that Susan expects that another pharmacy will open nearby at the end of three years and that this will drive the economic profit of her pharmacy to zero. What will be the revenue of the pharmacy in the fourth year for the new owner?
5. Should Susan purchase the pharmacy and sell it at the end of the third year?
6. What are the key risk assumptions and what do you think potential buyers will think of the risks?
|
What is the annual worth of the tunnel
: It has the initial cost of $1,000, the annual operating costs of $200, and the annual revenues of $400. What is the annual worth of the Tunnel?
|
|
How long will it be before she pays off the card
: Susan recently received a credit card with a nominal interest rate of 19 percent. with the card, she purchased some new clothes for $325.
|
|
What is the most likely stock price one year from now
: If the required return (rs) for Swanson is 15%, and the most recent dividend paid (D0) was $2.00, what is the most likely stock price one year from now?
|
|
What is the value of the depreciation tax shield in year
: Annual sales are estimated at $750,000 with costs of $338,000. The required rate of return is 12 percent and the tax rate is 34 percent.
|
|
Determine the net present value of the stream of profits
: Build a pro forma (forecasted) income from a economic approach for the same period and determine the expected EVA.
|
|
What is the size of the annual payments the father must make
: What is the size of the annual payments the father must make if the fund is to supply Susan with the above estimates?
|
|
Define srm concisely and demonstrate your understanding
: Define SRM concisely and demonstrate your understanding using an example in a county or state government.
|
|
Identify the present value of all of the scholarship gifts
: After year 50. no new donors arc recruited, so the department receives 51 gifts per year from the existing donors.
|
|
How many stocks are needed for delta hedging
: Suppose you write 1,000 XYZ call options w/ exercise price of $40 expiring in 5 months. Current stock price is $50 and its volatility is 40%.
|