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Chapter 6

Q. 6.1

The television division of an electronics firm requests $50 million from the central administration to develop, manufacture, and sell a new flat-screen model. Central administration borrows the $50 million at an interest rate of 8 percent to provide the cash to the television division. The television division invests the $50 million to generate annual profits of $2 million. What is the net effect of these transactions on the profit of the electronics firm?

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Verified Solution

The interest expense on the $100 million is $4 million annually. Therefore, the investment in the new flat-screen television caused a $2 million loss ($2 million profit – $4 million interest expense) to the electronics firm