You are evaluating the potential purchase of a small business currently generating $ 42,500 of after-tax cashflow. On the basis of a review of similar risk investment opportunities, you must earn 15% 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 assumptions about the growth rate of cash flows. What is the firm’s value if cash flows are expected to grow at an annual rate 12% for the first 2 years, followed by a constant rate of 9% from year 3 to infinity?

You are evaluating the potential purchase of a small business currently generating $ 42,500 of after-tax cashflow. On the basis of a review of similar risk investment opportunities, you must earn 15% 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 assumptions about the growth rate of cash flows. What is the firm’s value if cash flows are expected to grow at an annual rate 12% for the first 2 years, followed by a constant rate of 9% from year 3 to infinity?

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter12: Valuation: Cash-flow Based Approaches

Section: Chapter Questions

Problem 6QE: Suppose you are valuing a healthy, growing, profitable firm and you project that the firm will...

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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?
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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?
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As the general manager of a firm, you are presented with an investment proposal from one of your divisions. Its net present value, if discounted at the cost of capital for your firm (which is 15 percent), is $ 1 00,000, and its internal rate of return is 20 percent. (a) What are the economic interpretations of the net present value and internal rate of return figures? In other words, what do they mean? (b) What, if any, additional information would you like to have before approving the project?
Jupiter is considering investing time and administrative expense on an effort that promises one large payoff in the future, followed by additional expenses over a 10-year horizon. The cash flow profile is shown in the table below. Jupiter’s MARR is 12%/year. Solve, a. What is the present worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on present worth? c. Should Jupiter invest?
Valuation of companies can be done by forecasting a series of cash flows and then estimating a horizon value. Your firm projects net cash flow in years 1 through 5 as follows: Year 1 Year 2 Year 3 Year 4 Year 5 100 Million $ 120 Million $ 135 Million $ 140 Million $ 147 Million $ Assume that the company is expecting a growth rate of 6% starting year 5 and a discount rate of 12%; compute the PV of the company? Show the details of all your calculations.
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