accg301 homework
13.12
The imputed interest rate is the rate of return that the firm expects of its investments. It can be a required rate of return or can be based on organisation’s cost of capital. The weighted average cost of capital is the overall required return on the firm as a whole and, as such, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers. It is the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm.
13.26
1. WACC = (After tax cost of debt capital*market value of debt + cost of equity capital*market value of equity)/(market value of debt+ market value of equity)
={(1-0.04)*60 million + (0.15)* 90 million}/ (60 million+ 90 million) = 0.114
2. Economic value added = net operating profit after tax – invested capital * WACC
Real estate EVA = 20 million * (1-0.4) – {(100 million – 6 million)*0.114} = 1.285
Construction EVA = 18 million * (1-0.4) – {(60 million – 4 million)*0.114} = 4.416
13.31
1. retuen on sales = 540,000/7,200,000 = 7.5% investment turnover = 7,200,000/ 9,000,000 = 80% return on investment = 540,000/9,000,000 = 6%
2. strategy 1 : this profit will be down to 450,000 and invested capital would be 8,100,000. So return on investment will be 5.55%. this is less than normal of 6% therefore it should be rejected.
Strategy 2 : this has no impacts on assets or invested capital value. So doest not affect the business. Can accept but no need.
3. this strategy would affect its profit upward by 225,000. But reducing expenses can also have a bad impact as reducing expense in advertising can lead to loss of customers and market share.
4. ROI of abacus division = (4.5 million – 3.6 million)/7.5 million = 12%
ROI of palamino division = (6,750,000- 6,180,000)/7,125,000 = 8%
Both investments are good as it is higher than current ROI, 6%. But if it wishes to have higher ROI then it should only accept abacus
The imputed interest rate is the rate of return that the firm expects of its investments. It can be a required rate of return or can be based on organisation’s cost of capital. The weighted average cost of capital is the overall required return on the firm as a whole and, as such, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers. It is the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm.
13.26
1. WACC = (After tax cost of debt capital*market value of debt + cost of equity capital*market value of equity)/(market value of debt+ market value of equity)
={(1-0.04)*60 million + (0.15)* 90 million}/ (60 million+ 90 million) = 0.114
2. Economic value added = net operating profit after tax – invested capital * WACC
Real estate EVA = 20 million * (1-0.4) – {(100 million – 6 million)*0.114} = 1.285
Construction EVA = 18 million * (1-0.4) – {(60 million – 4 million)*0.114} = 4.416
13.31
1. retuen on sales = 540,000/7,200,000 = 7.5% investment turnover = 7,200,000/ 9,000,000 = 80% return on investment = 540,000/9,000,000 = 6%
2. strategy 1 : this profit will be down to 450,000 and invested capital would be 8,100,000. So return on investment will be 5.55%. this is less than normal of 6% therefore it should be rejected.
Strategy 2 : this has no impacts on assets or invested capital value. So doest not affect the business. Can accept but no need.
3. this strategy would affect its profit upward by 225,000. But reducing expenses can also have a bad impact as reducing expense in advertising can lead to loss of customers and market share.
4. ROI of abacus division = (4.5 million – 3.6 million)/7.5 million = 12%
ROI of palamino division = (6,750,000- 6,180,000)/7,125,000 = 8%
Both investments are good as it is higher than current ROI, 6%. But if it wishes to have higher ROI then it should only accept abacus