Determining initial yearly income and economic value


Task1. Frisker Motors is anticipated to have earnings of $6.00 per share at the end of the next year (date 1). Frisker will retain 75 percent of its earnings at the end of each of the next three years to finance new investments having a rate of return on equity ROE of 28 percent. Beginning with the end of year four and continuing forever after, Frisker plans to increase its dividend payout to 60 percent of earnings. Assuming that Frisker has a required rate of return of 12.5 percent and that the long-run expected ROE for Frisker's new investments is 18.75 percent; find out the value of shares in Frisker Motors.

Task2. Tod Lohman has filed a lawsuit against the party alleged to be at fault in an accident resulting in his total disability. You have been hired to facilitate expert testimony throughout the damage phase of the trial concerning the present value of Mr. Lohman's lost earning power. At the time of the accident, Mr. Lohman was earning an annual salary of $140,000. Work expectancy tables provided by the Bureau of Labor Statistics show that Mr. Lohman would have been anticipated to work another 25 years before retiring. The demand for specialists with Mr. Lohman’s training and work history point out that a combination of job performance and cost of living adjustments would have permitted his earnings to raise by roughly 5.8 percent per year throughout his career. South-western Mutual Life’s actuarial tables indicate that Mr. Lohman has a current life expectancy of 40 years. Suppose that prices are anticipated to raise constant at 4.0 percent per year over the next 40 years and that the money from any damage award can be invested at 11 percent per year.

a. Determine the economic (present) value of Mr. Lohman's lost earnings.

b. Determine the initial yearly income that could be provided from a damage award equivalent to the amount in part (a) supposing that Mr. Lohman would desire the purchasing power of his yearly income to remain constant for his remaining lifetime.

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Financial Accounting: Determining initial yearly income and economic value
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