Jay's Jams Inc

question 47

Multiple Choice

Jay's Jams Inc.was just established with an investment of $5 million into stereo equipment.Jay expects his company to generate $800,000 a year for the next 10 years, followed by $1 million a year for the following 10 years.If Jay's cost of capital is 15%, find the market value and book value of his company.

• A)Market value=$9.0 million; book value=$5.0 million
• B)Market value=$5.0 million; book value=$5.3 million
• C)Market value=$5.3 million; book value=$5.0 million
• D)Market value=$7.0 million; book value=$5.0 million Book Value = $5 million
• Market Value = $800,000(10 year annuity factor)
• + PV of $1mill (10 year annuity factor)
• = 800,000(5.02) + PV of 1 mill (5.02)
• = 4,016,000 + 5,020,000/4.05

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