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problem1. Chip’s Home Brew Whiskey management forecasts that when the firm sells each bottle of Snake-Bite for $20, then the demand for product will be 15,000 bottles per year, whereas sales will be 85 percent as high when the price is raised 13 percent. Chip’s variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent marginal tax rate. Management expects a raised working capital need of $3,000 for the year. What will be the effect of price raise on the firm’s FCF for the year?

problem2. Suppose that the average firm in your company's industry is anticipated to grow at a constant rate of 7% and that its dividend yield is 6%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R and D work that leads you to anticipates that its earnings and dividends will grow at a rate of 50% [D1 = D0 (1 + g) = D0 (1.50)] this year and 25% the following year, after which growth must return to the 7% industry average. When the last dividend paid (D0) was $2.5, what is value per share of your firm's stock?

Financial Accounting, Accounting

  • Category:- Financial Accounting
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