29 Jul HOW DO YOU DEAL WITH MONEY PROVIDED BY RELATIVES TO GET THE BUSINESS STARTED
The Benly Company needs to raise funds for a
major expansion. The company is debating whether to issue stock or to issue
bonds. If the company issues bonds, then its debts will increase and it will be
under additional stress to ensure that its revenues can cover the costs of its
debts. If it issues stock, the current owners will lose power and influence.
What should the company do? Explain your answer.
2)
The marketing director of National Midland
Mortgage has been arguing with senior management about building a $50 million
publishing facility. Others managers worried about the assumptions in the
analysis that support the investment and increase in the number of mortgages
processed and a reduction in processing costs. What if the mortgage market did
not grow as expected.?
A)
Should National Midland invest in the publishing
facility?
B)
What assumptions might the marketing director
have made to make the investment look worthwhile?
3)
Bob davies must decide whether to invest
$100,000 in his own business or in another local business. Both investment
projects have an expected life of five years. The cash flow of each is as
follows.
Year
Davies other
1 $20,000 $10,000
2 $30,000 $ $10,000
3 $ 40,000 $ 30,000
4
$ 10,000 $
40,000
5
$5,000 $
$50,000
4)
Suppose the risk of the projects is the same and
is accounted for by a risk premium of 6 percent per year. Would either
investment make sense? Which would be better?
5)
Explain what the incentives of bondholders and
stockholders are .Are they the same? How do they differ? Will a firm with no
debt act differently than a firm with a significant amount of Debt?
6)
In 2010 few firms were investing in new project
or expanding. Yet, interest rates were extremely low.Why,with this very low
cost of capital would firms not be investing in new projects?
7)
Calculate the added value for each of the following firms.
Microsoft
Value of output $ 2750
Wages and salaries $400
Cost of Capital $ 40
Cost of Material $1650
Barclays Bank :
Value of output
$ 5730
Wages and salaries $ 3953
Cost of capital $ 916
Cost of material $ 556
General motors :
Value of output : $
50091
Wages and salaries :
$29052
Cost of capital $ 15528
Cost of materials $ 7505
8) Explain why economic profit provide a better measure of
profit than accounting profit.
9) ) Explain what occurs when new technology makes another
one obsolete in terms of economic profit.
Consider firm A to be an existing firm using the old
technology. Firm B is the new firm with the new technology. Firm A earned
positive profits for years, but with the entrance of firm B, Firms A’s goods and
services are no longer desired.
10) In measuring
economic profit
A ) how do you deal with the onetime event
B) How do you deal with money provided by relatives to get
the business started
C) How do you handle off balance sheet expenses that is,
expenses that are incurred by the firm but are not measured as par of the firms
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