Christina Manning, great-granddaughter of the founder of Manning Tile Products and current president of the company, believes in simple, conservative accounting. In keeping with her philosophy, she has decreed that the company shall use straight line depreciation, based on the MACRS class lives, for all newly acquired assets. Your boss, the financial vice president and the only nonfamily officer, has asked you to develop an exhibit that shows how much this policy costs the company in terms of market value. Ms. Manning is interested in increasing the value of the firm’s stock because she fears a family stockholder revolt that might remove her from office. For your exhibit, assume that the company spends $100 million each year on new capital projects, that the projects have on average a 10-year class life, that the company has a 9 percent required rate of return, and that its marginal tax rate is 34 percent.
Answer to relevant QuestionsExplain why the following statement is true: “Other things being equal, firms with relatively stable sales are able to carry relatively high debt/assets ratios.”Assume that asymmetric information exists in the financial markets. If a firm’searnings fluctuate every year, everything else being equal, which of the dividendpolicies discussed in the chapter should be followed to ...Early next year, the Strasburg Company plans to raise a net amount of $270 million to finance new equipment and working capital. Two alternatives are being considered: common stock can be sold to net $60 per share, or bonds ...Last year the Bulls Business Bureau (BBB) retained $400,000 of the $1 million net income it generated. This year BBB generated net income equal to $1.2 million. If BBB follows the constant dividend payout ratio dividend ...“Every firm should use the EOQ model to determine the optimal level of inventory to maintain.” Discuss the accuracy of this statement with respect to the form of the EOQ model presented in this chapter.
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