A firm which is financed 60% by equity and 40% by debt is considering the introduction of a new product which will have a life of 5 years. Recent findings have shown an average return to equity of 15% which is 1.5% higher than the cost to equity and a return to debt before tax of 10% which is similar to cost of debt. Tax rate is 20% universal.
Two alternatives of promoting the product have been identified:
This will involve employing a number of agents. An immediate expenditure of Rs4M will be required to advertise the product. This will produce net annual cash inflows of Rs200,000 at the end of each of the five subsequent years. However the agents are to be paid Rs40,000 each year. On termination of the contract, the agents will have to be paid a lump sum of Rs80,000 at the end of the fifth year.
Under this alternative, the firm will not employ agents but will sell directly to the customers. The initial expenditure on advertising will be Rs220,000. This will bring in cash of Rs 130,000 at the end of each year. However this alternative will involve out-of-pocket sales administration to the extents of Rs35,000. The firm also proposes to allocate fixed costs worth Rs22,000 per year to this product if this alternative is pursued.
Advise the management as to the method of promotion to be adopted. You may assume a weighted average cost of capital in your analysis.
101papers.com is always working towards customer satisfaction. Our professional academic writers always aim at producing comprehensive papers that possess quality and originality at pocket-friendly prices. Students are assured that all their private information is safe with us.
101papers.com provides a system where students can request for money-back in case they cancel the order or in the rare instances of dissatisfaction. The refund policy adheres to the company’s term and conditions on money-back.Read more
While providing the best professional essay writing services, we guarantee all our students of plagiarism-free papers. All papers produced by our professional academic writers are checked against all web resources and previously completed papers to avoid plagiarism.Read more
In our urge to provide the best professional essay writing services, we guarantee students of free revision policy. The free revision policy is a courtesy service where students can request for unlimited for their completed papers. We always aim at achieving 100% customer satisfaction rates. The free revision policy is one among many of our major advantages.Read more
At 101papers.com, every student is entitled to total security. Our professional academic writers are always committed to protecting all private information of our customers. We do not share any personal information with third parties. Additionally, we provide safe systems for all online transactions.Read more
Working with us is the greatest step towards achieving all your academic goals. We always deliver the best professional essay writing services as promised. We, therefore, expect all students to work cooperatively with us, as we work towards achieving our goal, your satisfaction. This way, all services will be delivered accurately and on time.Read more