Aardvark Software Inc

question 29

Multiple Choice

Aardvark Software Inc. can purchase all the stock of Zebra Computer Services for $1,200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 12 years. Based solely on the cash flow analysis and the facts provided, Aardvark should

• A)not purchase Zebra Computer Services.
• B)purchase Zebra Computer Services.
• C)purchase Zebra only if Aardvark's cost of capital is between 5% and 10%.
• D)purchase Zebra only if Aardvark's cost of capital is above 10%.

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Definitions:

Interest-Bearing Note

A debt instrument that pays interest to the holder at a fixed or variable rate over a specified period.

Interest Expense

The cost incurred by an entity for borrowed funds, considered a non-operating expense on the income statement.

Notes Payable

A formal written agreement in which one party agrees to pay another a specific sum of money, either on demand or at a determined future date.

Interest-Bearing Note

A debt instrument that pays interest to the holder until its maturity date.