Question

In: Accounting

Phillip is planning on opening an electronics store. He will run it for only 1 year....

Phillip is planning on opening an electronics store. He will run it for only 1 year. The initial cost for opening a store is 500K and it will generate an EBIT of 800k at the end of year for sure. Risk-free rate is 5%, tax rate is 35%. Suppose Phillip has enough wealth to cover the initial cost of 500k. Assume that he can’t borrow money.

In this situation, would he want to open the electronic store? What is the value of his equity of the electronic store (at t=0) if he opens it?

If he opens the restaurant at t=0 and sell entire ownership of the electronic store to Zach at t=0, with what price can Phillip sell the ownership? How much return did Phillip make relative to his initial investment at t=0?

Solutions

Expert Solution

Given : initial investment required for establishment of electronic store = 500K

Current wealth of Philip = 50K

Amount to be borrowed from the bank = 500K - 50k = 450K

Present Value of the business

EBIT = 800K

less: interest = 22.5K (450K*5%)

EBT = 777.5

less: Tax = 272.125k

EAT = 505.375

Less:Loan repayment = 450k

Cash flows after tax from equity point of view = 55.375

Present Value of the business for John's = 55.375*PVF(5%,1) =55.375*0.952=52.738k

1. Yes, Philip can open the store as his net present value is positive

NPV = present value of inflows - present value of outflows = 52.738-50k = 2.738k

2.Present value of his equity is equal to the present value of his business at equity point of view i.e.= 52.73K

3.He can sell his ownership to Zach @ t=0 at any price on or above 52.73K to make a profit out of sale.

4. return from investment by philip = return / investment = (2.738/50K)*100=5.476%


Related Solutions

Phillip is planning on opening an electronics store. He will run it for only 1 year....
Phillip is planning on opening an electronics store. He will run it for only 1 year. The initial cost for opening a store is 500K and it will generate an EBIT of 800k at the end of year for sure. Risk-free rate is 5%, tax rate is 35%. Suppose John’s current wealth is 50k. He can borrow money from a bank. Bank knows that his electronic store will generate EBIT of 800k at the end of year for sure. In...
John is thinking to open a restaurant. He will run it only 1 year. Initial cost...
John is thinking to open a restaurant. He will run it only 1 year. Initial cost for opening a restaurant is 100k. Restaurant will generate EBIT of 200k at the end of year for sure. Risk-free rate is 5%. Tax rate is 35%. (a) Suppose John’s current wealth is 20k. He can borrow money from a bank. Bank knows that his restaurant will generate EBIT of 200k at the end of year for sure. In this situation, would he want...
Suppose that you work in the inventory planning department of a large electronics store, and a...
Suppose that you work in the inventory planning department of a large electronics store, and a (Q, R) inventory system is used to control the replenishment of a popular LCD computer monitor. The store pays $85 for each monitor when it purchases the monitors from its supplier in Asia; in addition, a fixed setup fee of $275 is charged for each order. Assume the annual holding rate is 15%. The penalty cost per shortage is $10. Monthly demand is normally...
he following data are for calculator sales in units at an electronics store over the past...
he following data are for calculator sales in units at an electronics store over the past nine​ weeks:                                                                              Week Sales Week Sales 1 4444 6 5757 2 4545 7 6565 3 4646 8 5555 4 5151 9 6464 5 5757 Use trend projection with regression to forecast sales for weeks 10minus−13. What are the error measures​ (CFE, MSE, sigmaσ​, ​MAD, and​ MAPE) for this forecasting​ procedure? How about r squaredr2​? Obtain the trend projection with regression forecast for weeks...
Rhoda owns an electronics store that is burglarized during the current year. The burglars destroy the...
Rhoda owns an electronics store that is burglarized during the current year. The burglars destroy the point-of-sale terminal and steal $330 from the cash drawer. The point-of-sale terminal was purchased for $7,580, and its adjusted basis is $3,670. The insurance adjuster estimates that the fair market value of a similar point-of-sale terminal is $6,010. The burglars also steal stereo equipment costing $4,040 that has a retail value of $7,185. In breaking into the store, the burglars break a large glass...
Question 1: Jaycar, an electronics store sponsors the Canterbury Bulldogs, a team that competes in the...
Question 1: Jaycar, an electronics store sponsors the Canterbury Bulldogs, a team that competes in the NRL. An individual store owner is looking to promote the sale of their 160W solar panels and is planning to offer a discount on the price of the panels from Monday to Friday based on the number of home games won in the past weekend of NRL. The owner of the store has asked us to do some analysis of the promotion assuming the...
Making financial decision's Jack is a 40-year-old construction worker. He makes $33,500 per year. He only...
Making financial decision's Jack is a 40-year-old construction worker. He makes $33,500 per year. He only saves 5 percent of his salary per year since it is all he feels he can afford. His friend Joe suggests that he invest his money conservatively so that it won’t lose as much value if the market takes a nosedive. His other friend Jim thinks that investing aggressively with high risk is the way to go since Jack has several years to work...
2. Ronald Zoller is planning to retire at the end of the current year. He estimates...
2. Ronald Zoller is planning to retire at the end of the current year. He estimates that he will need $18,000 a year for the next 15 years to meet his needs. Assuming the appropriate interest rate is $8%, how much should Zoller deposit on December 31 of the current year in order to be able to withdraw $18,000 at the end of each of the next 15 years. Table I used to solve this problem Table factor I used...
1. Your uncle is planning for retirement, and he wants to buy an annuity that will...
1. Your uncle is planning for retirement, and he wants to buy an annuity that will provide him with $96,000 of income a year for 20 years, with the first payment coming immediately. The market rate on this annuity is 5.25%. How much would the cost be today? Answer just the dollar amount without the + or - sign. Round to the nearest dollar. 2. What's the value today of $1,950 to be received in 5 years if the appropriate...
1. In a monopoly: a. Abnormal profits can only be earned in the short run b....
1. In a monopoly: a. Abnormal profits can only be earned in the short run b. A firm produces where total revenue equals total costs c. There are many firms competing d. There are barriers to entry 2. In monopolistic competition... a. firms may not increase price without losing all sales b. firms can easily exit the market in the short-run before economic losses occur c. firms work together to maximize profits d. firms may realize positive economic profits in...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT