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Investments

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1) A company plans to buy 34 jets for 120,000,000. Flight operations cost 7000000 and ground costs are 4000000 per year. The company expects to sell 300000 tickets and variable costs are expected to be 20% of revenue. With a 14% required rate of return, what annual revenue is needed to justify the purchase. Assumption is 20 year life and no salvage value at the end of 20 years.

2) A corporation has annual income of 4 million and has 1 million shares of stock outstanding. The company has no expansion opportunities and depreciation equals the replacement cost to maintain the current level of output, so income is available to distribute as dividends and is expected to continue indefinitely. Dividends are paid annually and the last dividend was just paid. Similar investments pay a rate of return of 16%. An investment opportunity available 1 year from now would require equity of 4 million and would provide income of 600,000 a year thereafter available for to distribution as dividends. The company would retain earnings to generate equity for this investment. Assuming investors are fully informed, what will be the price of the stocks 1 year from now and what rate of return will stock holders earn over the year with and without the new investment? Will Investors be happy because of this investment?

3) Asset A will pay 1000 in 1year, and asset B will pay 500 in 2years . Asset C will pay 1000 in 1year and 500 in 2years.Value of asset A is 900 and B is 400. What is the value of asset? What happens if asset C is bought for less than its value.

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Solution Summary

Answers questions on investments, stock price and value of assets.

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