Smiley’s Manufacturing Company is considering the purchase of a small business, J&R Raw Material Limited. This company currently earns after-tax cash flow of 250,000 per year. On the basis of a review of similar risk investment opportunities, one must earn a 11% rate of return on the proposed purchase. Please answer the following questions: a. What is the firm’s value if the company’s after-tax cash flows are not expected to grow for the foreseeable future? b. What is the firm’s value if after-tax cash flows are expected to grow at an annual rate of 2.5% for the foreseeable future? c. What price should you pay for J&R Consulting Limited if the after-tax cash flows are not expected to grow for the first two years, but then in year 3 it is expected to grow by 3% and then from year 4 onwards it is expected to grow by a constant annual rate of 4%? d. Your friend, Jenny, is risk averse and is considering which between a government bond investment and the purchase of this company she should undertake. Suggest an investment that will be suitable for Jenny’s risk preference, provide a brief explanation to support your choice. Thankyou for previously answering a,b &c can you please answer subpart D
Smiley’s Manufacturing Company is considering the purchase of a small business, J&R Raw Material Limited. This company currently earns after-tax cash flow of 250,000 per year. On the basis of a review of similar risk investment opportunities, one must earn a 11% rate of return on the proposed purchase. Please answer the following questions: a. What is the firm’s value if the company’s after-tax cash flows are not expected to grow for the foreseeable future? b. What is the firm’s value if after-tax cash flows are expected to grow at an annual rate of 2.5% for the foreseeable future? c. What price should you pay for J&R Consulting Limited if the after-tax cash flows are not expected to grow for the first two years, but then in year 3 it is expected to grow by 3% and then from year 4 onwards it is expected to grow by a constant annual rate of 4%? d. Your friend, Jenny, is risk averse and is considering which between a government bond investment and the purchase of this company she should undertake. Suggest an investment that will be suitable for Jenny’s risk preference, provide a brief explanation to support your choice. Thankyou for previously answering a,b &c can you please answer subpart D
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 25P
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Smiley’s Manufacturing Company is considering the purchase of a small business, J&R Raw Material Limited. This company currently earns after-tax cash flow of 250,000 per year. On
the basis of a review of similar risk investment opportunities, one must earn a 11% rate of
return on the proposed purchase. Please answer the following questions:
a. What is the firm’s value if the company’s after-tax cash flows are not expected to grow for the foreseeable future?
b. What is the firm’s value if after-tax cash flows are expected to grow at an annual rate
of 2.5% for the foreseeable future?
c. What price should you pay for J&R Consulting Limited if the after-tax cash flows are
not expected to grow for the first two years, but then in year 3 it is expected to grow by 3% and then from year 4 onwards it is expected to grow by a constant annual rate
of 4%?
d. Your friend, Jenny, is risk averse and is considering which between a government
bond investment and the purchase of this company she should undertake. Suggest an investment that will be suitable for Jenny’s risk preference, provide a brief
explanation to support your choice.
Thankyou for previously answering a,b &c can you please answer subpart D
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