MBA800X24

# 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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