Your Boss Just Turned Back Your Capital Budgeting Report Because

question 20

Essay

Your boss just turned back your capital budgeting report because she is unsure of your results. The yearly revenues are going up at a constant rate equal to the consumer price index of 4% and the discount used was 6%. The boss also mentions that the long term Treasury bond rate is only 71/2%. Explain the boss' dilemma and how it should be corrected.

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Definitions:

Subsidiary

A company that is completely or majority-owned by another company, referred to as the parent company, which controls its operations and policies.

Convertible Bonds

Bonds that can be converted into a predetermined number of the issuing company's shares at certain times during their life, usually at the discretion of the bondholder.

Consolidated Financial Statements

Financial reports that aggregate the financial position, results of operations, and cash flows of a parent company and its subsidiaries as one entity.

Amortization

The gradual reduction of a debt over a period of time through regular payments or the systematic allocation of intangible asset costs over its useful life.