Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 4, Problem 30PS
DCF valuation
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You are a consultant to a firm evaluating an expansion of its current business. The annual cash flow
forecasts (in millions of dollars) for the project are:
Annual Cash Flow
-91
Years
1 - 10
19
Based on the behaviour of the firm's stock, you believe that the beta of the firm is 1.4. Assuming
that the rate of return available on risk-free investments is 4% and that the expected rate of return
on the market portfolio is 10%, what is the net present value of the project? (Enter your answers In
millons. Round your answer to 2 decimal places. Use minus sign to enter negative answers, If
any.)
NPV
million
Assuming the below annual rates of return:
Annual Rates of Return:
Wamart - 12.36%
Coca Cola - 25.51%
Pfizer - 14%
CVS - 32.99%
Berkshire Hathaway - 29.66%
Assume that you initially invested $1,000,000 in the portfolio and that the distribution of the annual rate of return of the portfolio is normal.
What is the distribution of the return of the portfolio 20 years after its formation?
Provide the graph of the distribution of the return of the portfolio.
You are considering a $7,000 investment. The table shows the possible outcomes in cash flow next year. What is the standard deviation of the returns? Round your answer to the nearest tenth. table 1.4% 2.8% 6.0% 8.1%
Probability Possible Cash Flow
$925
$680
S485
0.1
0.2
0.4
Chapter 4 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 4 - True/false True or false? a. All stocks in an...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...Ch. 4 - Dividend discount model Company Z-prime is like Z...Ch. 4 - Dividend discount model If company Z (see Problem...Ch. 4 - Prob. 8PSCh. 4 - Prob. 9PSCh. 4 - Free cash flow Under what conditions does r, a...
Ch. 4 - Prob. 11PSCh. 4 - Prob. 12PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 23PSCh. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - DCF and free cash flow Permian Partners (PP)...Ch. 4 - DCF and free cash flow Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing Tree cash flow Phoenix Corp. faltered in...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- You are a provider of portfolio insurance and are establishing a 4-year program. The portfolio you manage is worth $110 million, and you hope to provide a minimum return of 0%. The equity portfolio has a standard deviation of 23% per year, and T-bills pay 5% per year. Assume that the portfolio pays no dividends.arrow_forwardConsider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $110,000 or $280,000 with equal probabilities of .5. The alternative risk-free investment in T-bills pays 6% per year. Now suppose that you require a risk premium of 10%. What is the price that you will be willing to pay? (Round your answer to the nearest whole dollar amount.)arrow_forwardWhat is the final portfolio value if you invested $250,000 into a portfolio six years ago, and which had the following sequence of returns: Year 1 = 4.95%, Year 2 = 9.05%, Year 3 = 2.25%, Year 4 = 7.08%, Year 5 = 16.33 %, Year 6 3.00%. = - -arrow_forward
- Suppose you makes a $1,000 initial investment today, a $4,000 additional investment at the end of year one, and another $500 investment at the end of year two. You had returns of 10% in year one, 2% in year two, and -5% in year three. What is the dollar-weighted average return on your investments? Select one: a. -2.59% b. 10.00% c. 0.51% d. -0.73% e. 3.00%arrow_forwardSteven Hocky (SH) is expected to generate free cash flow next year of 200. After next year, SH's cash flows are expected to grow at 4% per year forever. SH has an asset beta of 1, a debt beta of 0.1, and a D/V ratio of 0.2. The risk-free rate is 2% and the market risk premium is 6%. What is the current value of Steven Hocky?arrow_forwardConsider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $75,000 or $330,000 with equal probabilities of 0.5. The alternative risk-free investment in T-bills pays 3% per year. Now suppose that you require a risk premium of 12%. What price are you willing to pay?.arrow_forward
- Suppose you are willing to pay $30 today for a share of stock which you expect to sell at the end of one year for $32. If you require an annual rate of return of 12 percent, what must be the amount of the annual dividend which you expect to receive at the end of Year 1?arrow_forwardAn analyst produces the following series of annual dividend forecasts for company D: Expected dividend (end of) year t+1 = 10 euros; Expected dividend (end of) year t+2 = 20 euros; Expected dividend (end of) year t+3 = 10 euros. The analyst further expects that company D dividend will grow indefinitely at a rate of 2 percent after year t+3. Company D cost of equity equals 10 percent. Under these assumptions, calculate the analysts estimate of company D equity value at the end of year t.arrow_forwardWhat makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns. Buy a stock for $30 a share, hold it for three years, and then sell it for $60 a share (the stock pays annual dividends of $2 a share). Buy a security for $40, hold it for two years, and then sell it for $100 (current income on this security is zero). Buy a one-year, 5 percent note for $1,000 (assume that the note has a $1,000 par value and that it will be held to maturity).arrow_forward
- At the beginning of 2016, you invested $20,000 in Jersey Mike's Corporation (JMC), trading at $20 per share. JMC earned a return of 14% in 2016, 20% in 2017, -8% in 2018. Assume the risk-free rate is 3% per year. You can treat this risk-free asset as an asset with a constant rate of return. What was the cumulative return from the start of 2018 to the end of 2018 if you had formed the following portfolios: A. Buy 500 shares of JMC, invest the remainder in the risk-free asset. B. Buy 2,000 shares of JMC on margin, borrowing at the risk-free rate. (Hint: When you borrow from the risk-free asset, its weight in your portfolio should be negative.) C. Short-sell 1,000 shares of JMC, invest the remainder in the risk free asset.arrow_forwardYou are a consultant to a firm evaluating an expansion of its current business. The annual cash flow forecasts (in millions of dollars) for the project are Years 0 1 10 NPV Annual Cash Flow -95 17 Based on the behaviour of the firm's stock, you believe that the beta of the firm is 1.5. Assuming that the rate of return available on risk free investments is 5% and that the expected rate of return on the market portfolio is 13%, what is the net present value of the project? (Enter your answers in millions Round your answer to 2 decimal places. Use minus sign to enter negative answers, if any.) millionarrow_forwardSuppose that $18,000 is invested in a bond fund and the account grows to $23,344.74 in 5 yr. a. Use the model A = Pe" to determine the average rate of returm under continuous compounding. Round to the nearest tenth of a percent. b. How long will it take the investment to reach $30,000 if the rate of return continues? Round to the nearest tenth of a year.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Pfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning
Pfin (with Mindtap, 1 Term Printed Access Card) (...
Finance
ISBN:9780357033609
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Cengage Learning
Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY