Ten years ago Diana Torres wrote what has become the leading Tort textbook. She has been receiving
Question:
Ten years ago Diana Torres wrote what has become the leading Tort textbook. She has been receiving royalties based on revenues reported by the publisher. These revenues started at $1.7 million in the first year, and grew steadily by 4.9% per year. Her royalty rate is 18% of revenue.
Recently, she hired an auditor who discovered that the publisher had been underreporting revenues.
The book had actually earned 10% more in revenues than had been reported on her royalty statements.
a. Assuming the publisher pays an interest rate of 4.7% on missed payments, how much money does the publisher owe Diana?
b. The publisher is short of cash, so instead of paying Diana what is owed, the publisher is offering to increase her royalty rate on future book sales. Assume the book will generate revenues for an additional 20 years and that the current revenue growth will continue. If Diana would otherwise put the money into a bank account paying interest of 2%, what royalty rate would make her indifferent between accepting an increase in the future royalty rate and receiving the cash owed today.
AppendixLO1
Step by Step Answer:
Corporate Finance The Core
ISBN: 9781292431611
5th Global Edition
Authors: Jonathan Berk, Peter DeMarzo