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(a) Over a number of years, Honest Albert has built up a small but successful regulatory compliance consultancy and now wants to retire and sell off the business. You are interested in buying Albert’s business as you believe it will continue to be profitable. The value of all the physical assets included in the sale (test equipment, office equipment, computers, etc.) totals $95,000. However, Albert is asking for $135,000. Explain why Albert is able to sell his business for more than the declared value of the net assets on his balance sheet.
(b) To raise the money to purchase and take over Albert’s business, you have taken $42,000 from your own savings and borrowed $100,000 from the bank at a fixed, interest-only rate of 6.0% per year. You have put the surplus cash into a bank account set up especially for the business. When you took over, all the bills were paid and nobody owed the business any money. Construct a basic Balance Sheet representing the commencement of your new business. Show the totals for fixed assets (tangible and intangible), current assets, liabilities (current and long-term) and owner’s equity.
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Currently, Warren industries can sell 15-year, $1,000 par value bonds paying annual interest at a 12% coupon rate. As a result of current interest rates, the bonds can be sold for $1,010 each; flotation cost of $30 per bond will be incurred in this p..
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Your firm has been hired to develop new software for the university's class registration system. Under the contract, you will receive $500,000 as an upfront payment. What is the IRR of the opportunity now? What are the IRRs of this opportunity?
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