Question

In: Finance

Bella's Bone World, Inc. is a thriving bone production business! As the chief bone examiner, Bella...

Bella's Bone World, Inc. is a thriving bone production business! As the chief bone examiner, Bella is performing simple valuations as a starting point to determining the overall value of her bone production business. Bells uses a 9% required rate of return for operations. She used her 2019 financial statements to calculated her residual operating income as $25 million and net operating assets were $82 million at the end of 2019. Her residual operating income is expected to stay the same level for 2020 because even during the pandemic, dogs eat bones. While Bella does not expect growth, she expects to maintain her financial position in 2020.

For this question, you need to do two calculations. First, forecast Bella's operating income for 2020. Then calculate the value of operations for Bella's Bone World.

Select the answer below that most closely matches your calculations.

The format of the answer is: 2020 operating income, Value of operations

$36.2 million, $402.22 million

$32.92 million, $299.27 million

$74.02 million, $672.91 million

None of the above

$32.38 million, $359.78 million

Solutions

Expert Solution

Residual operating income is the income above the required return for the given rate of return. This is also called the net operating income.

Since the required rate of return is 9% and the value of operating assets is 82 million (investment on which return is calculated). The value of required return is 9% of 82 million = $ 7.38 million

Total return or the total operating income = residual operating income (2020 figure same as 2019 figure at 25 million) + value of required return calculated above = 7.38 +25.00 = $ 32.38 million Answer 1

For calculating the value of the business, since the residual income is not going to change over time, the value of perpetutity income received from this business is 32.38 million.

So Value = 32.38 mn/ 9% = $ 359.78 million Answer 2

$32.38 million, $359.78 million Final Answer


Related Solutions

Sweet Tooth Inc has a thriving PEZ dispenser business. Most of their revenue comes from the...
Sweet Tooth Inc has a thriving PEZ dispenser business. Most of their revenue comes from the variety of refill flavours they offer. Sweet tooth orders Pez refills by the case. Each case contains 50 packages of Pez Refills and each package contains 10 pez candies. They sell each package for $2 each. They have found that they sell on average 50,000 candies per month. All their orders are phoned in, in the interest of speed and efficiency. They have found...
Bella Groove and Frankie Jay commenced a new business on 1 January 2020. The business will...
Bella Groove and Frankie Jay commenced a new business on 1 January 2020. The business will operate a hip-hop dance studio, called ‘Groovy Dancing’ . Bella and Frankie will operate the business as a partnership. The dance studio will offer dance classes to children and adults. People will sign-up for classes for a period of 3 months at a time (with people attending one class each week), and sessions will run from February – April, May – July, August –...
You are the production manager for a global business with assembly facilities around the world. The...
You are the production manager for a global business with assembly facilities around the world. The business has tended to manufacture in the home country, a developed one, with the assembly of the products taking place in a strategically located country in each of the major groupings of markets. You have been asked to look at relocating some of the production of the older product lines in some of these assembly facilities and using them as production plants. Traditionally production...
Symptom Presentation: Cortisol: Increased production of cortisol by the adrenal cortex Bone Loss: Decreased bone mineral...
Symptom Presentation: Cortisol: Increased production of cortisol by the adrenal cortex Bone Loss: Decreased bone mineral density (BMD) confirmed via dual-energy x-ray absorptiometry (DEXA) Previously, you researched and considered three conditions through the process of differential diagnosis that would present with varying abnormalities in homeostasis, metabolism, triglycerides and DNA in week 1 and abnormalities in oxidation, plasma and tissue enzyme activity, inflammation and alopecia respectively in week 2. Given the new symptom presentation above, consider and answer the following questions...
“The warehouse fire on April 30 was a disaster!” exclaimed Paul May, FRS Inc.’s Chief production...
“The warehouse fire on April 30 was a disaster!” exclaimed Paul May, FRS Inc.’s Chief production officer. “We need to fill out the insurance forms as soon as possible to get back all our lost inventories. It seems the fire destroyed our accounting system as well as backup production documentation”, he continued. John Christensen, the company’s controller walks into Mr. May’s office and shouts “I was able to salvage some data. Have a look.” John’s data contained the following: Beginning...
Bella Inc. wishes to accumulate funds to provide a retirement annuity for its Vice President of...
Bella Inc. wishes to accumulate funds to provide a retirement annuity for its Vice President of Research, Edward Cullen. Mr. Cullen by contract will retire at the end of exactly 20 years. On retirement, he is entitled to receive an annual end-of-year payment of $35,000 for exactly 30 years. If he dies prior to the end of the 30-year period, the annual payments will pass to his heirs. During the 20-year ‘accumulation period’, Bella Inc. wishes to fund the annuity...
Bella Coffee, Inc., sells two types of coffee, Irish and Cold Mountain. The monthly budget for...
Bella Coffee, Inc., sells two types of coffee, Irish and Cold Mountain. The monthly budget for U.S. coffee sales is based on a combination of last year's performance, a forecast of industry sales, and the company's expected share of the U.S. market. The following information is provided for March:                                                  Actual                                  Budget   Irish Cold Mountain         Irish        Cold Mountain Sales in pounds 7,000 lbs.       8,000 lbs. 6,400 lbs.         8,600 lbs Price per pound $25                 $30                 $25                 $30 Variable cost per pound 11                   14                   12                   13 Contribution...
1)Describe who needs information about a business and why they may need it. 2) Bella Rich...
1)Describe who needs information about a business and why they may need it. 2) Bella Rich is enthusiastic about starting her catering business. She feels confident that she has a great concept and can handle the day-to-day details of running a business. However, this is her first attempt at running her own business. Advise Bella on the risks associated with starting a business.
On January 2, 2019, Twilight Hospital purchased a $104,400 special radiology scanner from Bella Inc. The...
On January 2, 2019, Twilight Hospital purchased a $104,400 special radiology scanner from Bella Inc. The scanner had a useful life of 4 years and was estimated to have no disposal value at the end of its useful life. The straight-line method of depreciation is used on this scanner. Annual operating costs with this scanner are $106,000. Approximately one year later, the hospital is approached by Dyno Technology salesperson, Jacob Cullen, who indicated that purchasing the scanner in 2019 from...
The following numbers were calculated from the financial statements of Bella’s Bone World (BBW) for 2019....
The following numbers were calculated from the financial statements of Bella’s Bone World (BBW) for 2019. Net Operating Assets = $102,800,000 (102.8 million) Net Financial Obligations = $20,700,000 (20.7 million) Asset Turnover (2019) = 2.1 Core Operating Profit Margin, after tax = 7.95% 1. Calculate the core return on net operating assets for 2019. Use two places beyond the decimal and format as a percent. Do not include a percent sign. 2. You forecast that the core profit margin and...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT