Finance Answers

Explain expenditure-changing and expenditure-switching policies. Using the swan diagram, explain how these policies can be used to achieve external and internal balance.

1. Yummy Burgers is analyzing the possible acquisition of Apple Pizzas. Neither firm has debt. The forecasts of Yummy Burgers show that the purchase would increase its annual aftertax cash flow by $390,000 indefinitely. The current market value of Apple Pizzas is $8 million. The current market value of Yummy Burgers is $22 million. The appropriate discount rate for the incremental cash flows is 8 percent. Yummy Burgers is trying to decide whether it would offer 25 percent of its stock or $10 million in cash to Apple Pizzas.

a. What is the synergy from the merger?

b. What is the value of Apple Pizzas to Yummy Burgers?

c. What is the cost to Yummy Burgers of each alternative?

d. What is the NPV to Yummy Burgers of each alternative?

e. What alternative should Yummy Burgers use?

Describe a scenario in which you thought you were making a good decision but there was still a negative outcome.

Dapun, Ayuban, and Russel have equities in a partnership of P600,000, P900,000, and P500,000,

respectively, and share profits and losses in a ratio of 2:1:2, respectively. The partners have agreed to

admit Amolo to the partnership.

Earl E. Bird has decided to start saving for his retirement. Beginning on his twenty-first birthday, Earl plans to invest $2,000 each birthday into a savings investment earning a 3 The Time Value of Money 67 7 percent compound annual rate of interest. He will continue this savings program for a total of 10 years and then stop making payments. But his savings will continue to compound at 7 percent for 35 more years, until Earl retires at age 65. Ivana Waite also plans to invest $2,000 a year, on each birthday, at 7 percent, and will do so for a total of 35 years. However, she will not begin her contributions until her thirty-first birthday. How much will Earl’s and Ivana’s savings programs be worth at the retirement age of 65? Who is better off financially at retirement, and by how much?

The present value of ₱ 1,000 to be received at the end of 8 years is ₱ 800. (a) What is the accumulated value of ₱ 800 at the end of 10 years? (b) If the interest rate adjusted to inflation is 7.97%, what is the inflation rate in this problem?