CashCow Inc is all equity financed and generates perpetual annual EBIT of $100. Assume that the EBIT, and all other cash flows, occur at year end and that we are currently at the beginning of a year
CashCow has 150 shares outstanding and shareholders require a return of 10%. CashCow hires a new CEO, a Mr. Cowslowski, who spends 10% of EBIT on parties, houses and yachts. Assume that this spending is expected to continue in perpetuity. What price will the shares trade at after Mr. Cowslowski is hired? The tax rate is 40%.
A) $3.20
B) $3.40
C) $3.60
D) $3.80
E) $4.00
C
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Why is it fairly easy to fall into the trap of discounting real cash flows with nominal rates?
A) it is difficult to determine real discount rates. B) increases in revenues are offset by increases in costs. C) increases in nominal cash flows are often not forecast. D) inflation does not impact cash flows, but it does impact discount rates.
________ needs are the operational needs related to the engineering aspect of making the product
A) Primary B) Secondary C) Tertiary D) Biological