Question
In: Finance
Build a two-variable table showing the value of a company whose after-tax profit is $1,000 for...
Build a two-variable table showing the value of a company whose after-tax profit is $1,000 for different values of g and ROIC. Assume r, the discount rate, is 10%.
ROIC (horizontal axis): between 6% and 16% (increments of 2%) g (vertical axis): between 0 and 8% (increments of 2%)
Use Excel’s Data Table function in the Data/What-if Analysis tab
Questions:
1. What do you notice when g increases? Explain.
2. What happens when r = ROIC? Why is that so?
Solutions
Expert Solution
1) It is seen that as g increases the value of the firm decreases when ROIC is below the discount rate, while the value increases when ROIC is greater than the discount rate . So any situation when ROIC is less than the discount rate is value destroying for the company while it is value creating once the ROIC> WACC
2)
When r = ROIC =10% , we find that the value of the company remains constant irrespective of the growth rate of the company. This is because, the value for a company comes only when the returns exceed the cost and when it is equal to the cost, there is indifference in the value of the firm.
Calculations
jeff jeffy answered 4 months agoRelated Solutions
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Cornerstone Exercise 16.4 (Algorithmic)
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Olivian Company wants to earn $600,000 in net (after-tax) income
next year. Its product is priced at $400 per unit. Product costs
include:
Direct materials
$120.00
Direct labor
$88.00
Variable overhead
$20.00
Total fixed factory overhead
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Variable selling expense is $16 per unit; fixed selling and
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After-Tax Profit Targets
Olivian Company wants to earn $300,000 in net (after-tax) income
next year. Its product is priced at $300 per unit. Product costs
include:
Direct materials
$90.00
Direct labor
$66.00
Variable overhead
$15.00
Total fixed factory overhead
$420,000
Variable selling expense is $12 per unit; fixed selling and
administrative expense totals $270,000. Olivian has a tax rate of
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Required:
1. Calculate the before-tax profit needed to
achieve an after-tax target of $300,000....
After-Tax Profit Targets Olivian Company wants to earn $300,000 in net (after-tax) income next year. Its...
After-Tax Profit Targets
Olivian Company wants to earn $300,000 in net (after-tax) income
next year. Its product is priced at $400 per unit. Product costs
include:
Direct materials
$120.00
Direct labor
$88.00
Variable overhead
$20.00
Total fixed factory overhead
$450,000
Variable selling expense is $16 per unit; fixed selling and
administrative expense totals $300,000. Olivian has a tax rate of
40 percent.
Required:
1. Calculate the before-tax profit needed to
achieve an after-tax target of $300,000.
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After-Tax Profit Targets Olivian Company wants to earn $300,000 in net (after-tax) income next year. Its...
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Product costs include:
Direct materials $75.00
Direct labor $55.00
Variable overhead $12.50
Total fixed factory overhead $445,000
Variable selling expense is $10 per unit; fixed selling and
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Required: 1. Calculate the before-tax profit needed to achieve
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$105.00
Direct labor
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Variable overhead
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Total fixed factory overhead
$410,000
Variable selling expense is $14 per unit; fixed selling and
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Ordinary share capital (50p shares) £200,000
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Balance sheet
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2019
2018
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8,313
11,604
Marketable securities
696
618
Account receivables
23,795
30,563
Inventory
1,619
1,682
Prepaid expenses
3,997
4,678
Net Fixed Assets
96,457
68,764
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17,309
5,473
Account payables
24,600
21,372
Wages and salaries payable
13,101
16,855
Bond payable (10 yrs.)
54,102
35,605
Notes payable (3 yrs.)
39,398
32,621
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2019
2018
Revenues
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79,591
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