What is the implied assumption about interest rates when the equation to calculate the present value (PV) of perpetuity is used?
What will be an ideal response?
Answer: The equation for computation of present value of perpetuity assumes that the interest rates are the same for every maturity on the yield curve.
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Capital rationing may be imposed because of all of the following EXCEPT
A) management has a fear of debt. B) the company's stock price is at an historically high level. C) capital market conditions are poor. D) stockholder control problems prevent issuance of additional stock.
Mountain Recreation, Inc. is considering a new product line. The company currently manufactures
several lines of snow skiing apparel. The new products, insulated ski bikinis, are expected to generate sales of $1.2 million per year for the next five years. They expect that during this five-year period, they will lose about $150,000 each year in sales on their existing lines of longer ski pants. The new line will require no additional equipment or space in the plant and can be produced in the same manner as the apparel products. The new project will, however, require that the company spend an additional $50,000 per year on insurance in case customers sue for frostbite. Also, a new marketing director would be hired to oversee the line at $75,000 per year in salary and benefits. Because of the different construction of the bikinis, an increase in inventory of $9,000 would be required initially. If the marginal tax rate is 35%, compute the incremental after-tax cash flows for years 1-5. A) $634,500 per year B) $537,500 per year C) $625,000 per year D) $601,250 per year