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Bus 505,

Activity assignment for week 1

1-The head of the accounting department at a major software manufacturer has asked you to put together a pro forma statement of the company’s value under several possible growth scenarios and the assumption that the company’s many divisions will remain a single entity forever. The manager is concerned that, despite the fact that the firm’s competitors are comparatively small, collectively their annual revenue growth has exceeded 50 percent over each of the last five years. She has requested that the value projections be based on the firm’s current profits of $3.2 billion (which have yet to be paid out to stockholders) and the average interest rate over the past 20 years (6 percent) in each of the following profit growth scenarios: (LO5, LO7)

a. Profits grow at an annual rate of 9 percent. (This one is tricky.)

b. Profits grow at an annual rate of 2 percent.

c. Profits grow at an annual rate of 0 percent.

d. Profits decline at an annual rate of 4 percent.

2-You are in the market for a new refrigerator for your company’s lounge, and you have narrowed the search down to two models. The energy-efficient model sells for $1,700 and will save you $45 in electricity costs at the end of each of the next five years. The standard model has features similar to the energy-efficient model but provides no future saving in electricity costs. It is priced at only $1,500.

Assuming your opportunity cost of funds is 6 percent, which refrigerator should you purchase? (LO1, LO5, LO