Question

Ten years ago Diana Torres wrote what has become the leading Tort textbook. She has been receiving royalties based on revenues reported by the publisher. These revenues started at $1.4 million in the first​ year, and grew steadily by 5.9% per year. Her royalty rate is 15% of revenue.​ Recently, she hired an auditor who discovered that the publisher had been under reporting revenues. The book had actually earned 10% more in revenues than had been reported on her royalty statements.

a. Assuming the publisher pays an interest rate of 3.7% on missed​ payments, how much money does the publisher owe​ Diana?

b. The publisher is short of​ cash, so instead of paying Diana what is​ owed, the publisher is offering to increase her royalty rate on future book sales. Assume the book will generate revenues for an additional 20 years and that the current revenue growth will continue. If Diana would otherwise put the money into a bank account paying interest of 3.8%​, what royalty rate would make her indifferent between accepting an increase in the future royalty rate and receiving the cash owed today.

please , show every process !

Answer 1

a.

Early Royalty received = 15% of revenue row

Actual royalty should be receiving = 15% of actual revenue row

Amount Pending = Actual royalty should be receiving - Early Royalty received

PV of all missed payments = Amount Pending*(Interest rate on missed payment)^time

Total value owed = Sum of PV of all missed payments

b.

Revenue = Revenue at year -1(cell L4)*1.0539 (then drag it till year19)

FV of owed amount = Amount owed*(bank rate)^20

Amount with 15% royalty = SUM of all royalty recived

Amount of royalty should be reciving = Amount with 15% royalty + FV of owed amount

Initially amount with 16% royalty will be = SUM of all royalty recived

We have to use goal seek function, by setting cell C25 as $15.615 changing cell C21. It will give us 16% .