MBA800X24 - A. Value of asset: .7($6,000) + .3($10,000) =...

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A. Value of asset: .7($6,000) + .3($10,000) = $7,200 (0.56+0.12)($6,000) + (0.14+0.18)($10,000) = $7,280 ($7,200/1.08) + ($7,280/1.08^2) = $12,908 Cash $7,092 Equity $20,000 Asset 12,908 $20,000 $20,000 B. Cash is increased by $10,000. Asset value is: 0.6($10,000) + 0.4($6,000) = $8,400 $8,400/1.08 = $7,778 Cash $17,092 Equity $24,870 Asset 7,778 $24,870 $24,870 C. Investment began at $12,908. Given an 8% rate would be: $12,908 X 1.08 = $13,941 (normal earnings are $13,941 - $12,908 = $1,033) Change in Equity is $24,870 - $20,000 = $4,870 $4,870 - $1,033 = $3,837 (earnings minus normal earnings equals abnormal earnings) OR: Total assets began at $20,000. Given an 8% rate would be: $20,000 X 1.08 = $21,600 (normal earnings are $21,600 - $20,000 = $1,600) Change in Equity is $24,870 - $20,000 = $4,870 $4,870 - $1,600 = $3,270 (earnings minus normal earnings equals abnormal earnings) D. Cash $17,092 Equity $23,546 Asset 6,454 $23,546 $23,546 E. $24,870/$23,546 = 1.06 F. $4,870 economic earnings
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This note was uploaded on 07/28/2011 for the course MBA 800 taught by Professor Wallin during the Summer '11 term at Ohio State.

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MBA800X24 - A. Value of asset: .7($6,000) + .3($10,000) =...

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