Free cash flow valuation You are evaluating the potential purchase of a small business with no debt or preferredstock that is currently generating $42,400 of free cash flow (FCF 0 = $42,400). On the basis of a review of similar-riskinvestment opportunites, you must earn a(n) 16% rate of return on the proposed purchase. Because you are relativelyuncertain about future cash flows, you decide to estimate the firm's value using several possible assumptions about thegrowth rate of cash flows.a. What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity?b. What is the firm's value if cash flows are expected to grow at a constant annual rate of 6% from now to infinity?c. What is the firm's value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed bya constant annual rate of 6% from year 3 to infinity?a. The firm's value, if cash flows are expected to grow at an annual rate of 0% from now to infinity, is $the nearest cent.)(Round to

Expecation of increase in Free Cash Flow will increase the value of firm. We have been given 3…

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Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Free cash flow valuation You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating $42,300 of free cash flow (FCF0=$42,300).On the basis of a review of similar-risk investment opportunites, you must earn a(n) 17% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using several possible assumptions about the growth rate of cash flows. a. What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity? b. What is the firm's value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity? c. What is the firm's value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 7%from year 3 to infinity? I just need answer C
Free cash flow valuation You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating $42,500 of free cash flow (FCF0 = $42,500). On the basis of a review of similar-risk invest-ment opportunities, you must earn an 18% rate of return on the proposed pur-chase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm’s value using several possible assumptions about the growth rate of cash flows. a. What is the firm’s value if cash flows are expected to grow at an annual rate of 0% from now to infinity?b. What is the firm’s value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity?c. What is the firm’s value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity
You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating $41,200 of free cash flow (FCF0= $41,200). On the basis of a review of similar-risk investment opportunites, you must earn a(n)19% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using several possible assumptions about the growth rate of cash flows. a. What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity? b. What is the firm's value if cash flows are expected to grow at a constant annual rate of 6% from now to infinity? c. What is the firm's value if cash flows are expected to grow at an annual rate of13% for the first 2 years, followed by a constant annual rate of 6% from year 3 to infinity?
You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating$42,200of free cash flow(FCF 0 =$42, 200).On the basis of a review of similar-risk investment opportunites, you must earn a(n)18%rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using several possible assumptions about the growth rate of cash flows. a. What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity? b. What is the firm's value if cash flows are expected to grow at a constant annual rate of7%from now to infinity? c. What is the firm's value if cash flows are expected to grow at an annual rate of12%for the first 2 years, followed by a constant annual rate of 7%from year 3 to infinity?
You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating $41,300 of free cash flow (FCF0= $41,300). On the basis of a review of similar-risk investment opportunites, you must earn a(n) 20% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using several possible assumptions about the growth rate of cash flows. a. What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity? b. What is the firm's value if cash flows are expected to grow at a constant annual rate of 8% from now to infinity? c. What is the firm's value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 8%from year 3 to infinity?
Question a) You are evaluating the potential purchase of a small business currently generating $42,500 of after-tax cash flow. On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using several possible assumptions about the growth rate of cash flows. (i) What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity? (ii) What is the firm's value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity? (iii) What is the firm's value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity?
You are evaluating the potential purchase of a small business currently generating $42,500 of after-tax cash flow. On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm’s value using several possible assumptions about the growth rate of cash flows.(i) What is the firm’s value if cash flows are expected to grow at an annual rate of 0% from now to infinity? (ii) What is the firm’s value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity? (iii) What is the firm’s value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity?
Risk-adjusted rates of return using CAPM Centennial Catering, Inc., is considering two mutually exclusive investments. The company wishes to use a CAPM-type risk-adjusted discount rate (RADR) in its analysis. Centennial's managers believe that the appropriate market rate of return is 12.2%, and they observe that the current risk-free rate of return is 7.4%. Cash flows associated with the two projects are shown in the following table. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet) Initial investment (CFO) Year (f) 1 234 Project X $67,000 Project Y $84,000 Cash inflows (CF) $30,000 30,000 30,000 30,000 $26,000 32,000 42,000 48,000 a. Use a risk-adjusted discount rate approach to calculate the net present value of each project, given that project X has an RADR factor of 1.19 and project Y has an RADR factor of 1.39. The RADR factors are similar to project betas. (Hint: Use the following equation to calculate the required project return…
Free cash flow valuation Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. . After year 5, the firm expects its free cash flow to The firm's weighted average cost of capital is 11%, and it has $3,920,000 of debt at market value and $780,000 of preferred stock in terms of market value. The estimated free cash flows over the next 5 years, 1 through 5, are given in the table, grow by 6% annually. a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model. b. Use your finding in part a, along with the data provided above, to find Nabor Industries' common stock value. c. If the firm plans to issue 200,000 shares of common stock,…
Being Finance Manager of Salalah Textiles Industries, you need to invest an amount for OMR 50,000 in the investment market. Assume the market rate of return is 0.11, risk free rate of return is 2.75% and Beta is .73, then:Required:a) What should be required rate of return for your investment?
Free cash flow valuation Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. After year the firm expects its free cash flow to grow by 5% The firm's weighted average cost of capital is 13%, and it has $2,220,000 of debt at market value and $440,000 of preferred stock in terms of market value. The estimated free cash flows over the next 5 years, 1 through 5, are given in the table, annually. a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model. b. Use your finding in part a, along with the data provided above, to find Nabor Industries' common stock value. c. If the firm plans to issue 200,000 shares of common stock, what is…
K-Life financial services Limited uses risk-adjusted return on capital (RAROC) to measure performance on several aspects. In this regard, imagine that an investment officer wants to execute a transaction with the following characteristics: Probability of default (PD) = 30 basis points Loss given default (LGD) = 55% Exposure at default (EAD) = K 1.45 million Expected loss (EL) = K 2,750 This is a loan to a company in the Agro industrial. The firm’s economic capital (EC) model is based on the 99% confidence level, with an average standard deviation of 2.15%. The risk-free rate of return is 6%. Assume that the bank has set a RAROC hurdle rate of 15% and this transaction has a net profit of K10, 500. REQUIRED: Compute the K-life’s risk-adjusted rate of return on this transaction. Now assume that K-life could also have made a loan for the same amount to a firm in the service industry, and that the standard deviation for economic capital purposes in this case is 1.29%. Compute the bank’s…

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