Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

Bobs Bikes Ltd has recently (late 2003) completed a $100,000, two-year marketing study on introducing a new tricycle model. Based on the results of the study, Bobs Bikes expects to sell 1,000 of the new tricycles in 2004 at a price of $300 each. Sales volume will grow at 10% p.a. for the four years through to 2007 in real terms and Bobs expects that the price for each tricycle will increase along with the expected inflation rate of 5% p.a.

Bobs will need to buy a tricycle welding machine for $500,000. The machine will be depreciated for tax purposes over five years using straight line depreciation. The incremental labour expenses to produce the tricycles will be $100,000 p.a. without allowing for inflation. Materials are expected to cost $100 per tricycle in 2004 dollars Labour and materials prices will grow with inflation. Bobs Bikes also expects that the company will need $100,000 in working capital to run the business; this amount is not expected to grow.

Bobs Bikes is an ongoing, profitable business and pays taxes at a 30% rate on all income. Bobs Bikes has a 50% target debt/equity ratio, a nominal cost of equity of 14% p.a. and a nominal cost of debt of 8% p.a.

At the end of 2007 Bobs Bikes plans to consider the following alternatives:

a) Sell the welding machine for $200,000 and close the tricycle business; or

b) Sell the tricycle business for an after-tax price of five times the 2007 after-tax profit

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M938102

Have any Question? 


Related Questions in Basic Finance

A firm is considering the development of severalnew

A firm is considering the development of severalnew products. The products under consideration are listed in the next table. Products in each group are mutually exclusive. At most, one product from each group will be sel ...

The following information was available spot rate for

The following information was available: Spot rate for Japanese yen: $0.009313 730-day forward rate for Japanese yen: $0.010475 (assume a 365-day year) U.S. risk-free rate: 7.0 percent Japanese risk-free rate: 1.0 percen ...

How do options on futures differ from options on the asset

How do options on futures differ from options on the asset underlying the futures? The open interest in a futures contract changes from day to day. Suppose that investors holding long positions are divided into two group ...

You buy a stock for 35 per share one year later you receive

You buy a stock for $35 per share. One year later you receive a dividend of $3.50 per share and sell the stock for $30 per share. 1.What is your total rate of return on this investment?. 2.What is your capital gain or lo ...

You are the auditor of piedmore corporation you determine

You are the auditor of Piedmore Corporation. You determine that the accounts receivable turnover has been much slower this period than in prior periods and that it is also materially lower than the industry average. How ...

1 why is specialization so critical to distribution

1. Why is specialization so critical to distribution efficiency? 2. Describe how the process of assortment overcomes the problems created by specialization. 3. Given the principle of minimum transactions, explain why it ...

There is an ongoing debate on the amount of regulation of

There is an ongoing debate on the amount of regulation of derivatives. What are your opinions on derivatives regulation? Should this market have increased regulation? Why or why not?

Nbspa shoe company checks police records on 1200 randomly

A shoe company checks police records on 1200 randomly selected auto accidents and notes that teenagers were at the wheel in 180 of them. Construct a 90% confidence interval estimate of the proportion of shoe accidents th ...

Duff beer is considering loosening its credit standards and

Duff Beer is considering loosening its credit standards and lengthening the terms from net 30 days to net 45. Doing so will result in higher sales but also more defaults and extra administrative costs. Assuming variable ...

Suppose the call price is 1420 and the put price is 930 for

Suppose the call price is $14.20 and the put price is $9.30 for stock options where the exercise price is $100, the risk-free interest rate is 5 percent (continuously compounded), and the time to expiration is 1 year. Ex ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen