Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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.

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

million in the first year, and grew steadily by

5 %

per year. Her royalty rate is

15 %

of revenue. Recently, she hired an auditor who discovered that the publisher had been under reporting 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 %

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

3 %

,

what royalty rate would make her indifferent between accepting an increase in the future royalty rate and receiving the cash owed today.

Question content area bottom

Part 1

a. Assuming the publisher pays an interest rate of

4 %

on missed payments, how much money does the publisher owe Diana?

The present value of missing payments for the

10

-year

period is

$enter your response here

.

(Round to the nearest dollar.)

Part 2

The publisher owes Diana

$enter your response here

.

(Round to the nearest dollar.)

Part 3

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

3 %

,

what royalty rate would make her indifferent between accepting an increase in the future royalty rate and receiving the cash owed today.

The new royalty rate must be

enter your response here

%.

(Round to two decimal places.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Populists Plungers And Progressives

Authors: Cedric B. Cowing

1st Edition

0691621993, 978-0691621999

More Books

Students also viewed these Finance questions