Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 7, Problem 25SP
Start with the partial model in the file Ch07 P25 Build a Model.xlsx on the textbook’s Web site. Selected data for the Derby Corporation are shown here. Use the data to answer the following questions.
- a. Calculate the estimated horizon value (i.e., the value of operations at the end of the
forecast period immediately after the Year-4free cash flow ). Assume growth becomes constant after Year 3. - b. Calculate the
present value of the horizon value, the present value of the free cash flows, and the estimated Year-0 value of operations. - c. Calculate the estimated Year-0 price per share of common equity.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Start with the partial model in the file Ch07 P25 Build a Model.xlsx on the textbook’s Web site. Selected data for the Derby Corporation are shown here. Use the data to answer the following questions.a. Calculate the estimated horizon value (i.e., the value of operations at the end of the forecast period immediately after the Year-4 free cash flow). Assume growth becomes constant after Year 3.b. Calculate the present value of the horizon value, the present value of the free cash flows, and the estimated Year-0 value of operations. c. Calculate the estimated Year-0 price per share of common equity. INPUTS (In Millions) YearCurrent Projected0 1 2 3 4Free cash flow −$20.0 $20.0 $80.0 $84.0Marketable securities $40Notes payable $100Long-term bonds $300Preferred stock $50WACC 9.00%Number of shares of stock 40
Consider an investment where the cash flows are:
– $946.21 at time t = 0 (negative since this is your initial investment)
$377 at time t = 1 in years
$204 at time t = 2 in years
$499 at time t = 3 in years
(a) Use Excel's "Solver" to find the internal rate of return (IRR) of this investment. Take a screen shot showing
Solver open with your entries for the function clearly visible. Paste the screen shot into an application (like
Paint), and save it as a (.png) file. Upload your screenshot below.
(b) What is the value of IRR found by Solver?
Suppose a project has an initial outflow of $600000. If the cash flows projected for years 1-6 are $225000, $200000, $250000, $100000, $0, and $50000, respectively the IRR.
Draw the timeline.
Set up (by hand) the equation to solve for IRR. DO NOT SOLVE.
Solve for the IRR using excel.
Create a data table in excel to solve for the NPV based on different costs of capital and initial outflow.
Chapter 7 Solutions
Financial Management: Theory & Practice
Ch. 7 - Two investors are evaluating General Electric’s...Ch. 7 - A bond that pays interest forever and has no...Ch. 7 - Explain how to use the free cash flow valuation...Ch. 7 - Ogier Incorporated currently has $800 million in...Ch. 7 - EMC Corporations current free cash flow is 400,000...Ch. 7 - Prob. 3PCh. 7 - JenBritt Incorporated had a free cash flow (FCF)...Ch. 7 - Blunderbluss Manufacturing’s balance sheets report...Ch. 7 - Thress Industries just paid a dividend of $1.50 a...Ch. 7 - Boehm Incorporated is expected to pay a 1.50 per...
Ch. 7 - Woidtke Manufacturing’s stock currently sells for...Ch. 7 - A company currently pays a dividend of $2 per...Ch. 7 - Nick’s Enchiladas has preferred stock outstanding...Ch. 7 - Brook Corporation’s free cash flow for the current...Ch. 7 - Kendra Enterprises has never paid a dividend. Free...Ch. 7 - Dozier Corporation is a fast-growing supplier of...Ch. 7 - Brushy Mountain Mining Companys coal reserves are...Ch. 7 - Prob. 15PCh. 7 - Crisp Cookware’s common stock is expected to pay a...Ch. 7 - Prob. 17PCh. 7 - Assume that the average firm in C&J Corporation’s...Ch. 7 - Simpkins Corporation does not pay any dividends...Ch. 7 - Several years ago, Rolen Riders issued preferred...Ch. 7 - You buy a share of The Ludwig Corporation stock...Ch. 7 - You are analyzing Jillians Jewelry (JJ) stock for...Ch. 7 - Reizenstein Technologies (RT) has just developed a...Ch. 7 - Conroy Consulting Corporation (CCC) has a current...Ch. 7 - Start with the partial model in the file Ch07 P25...Ch. 7 - Prob. 26SPCh. 7 - Start with the partial model in the file Ch07 P27...Ch. 7 - Describe briefly the legal rights and privileges...Ch. 7 - Prob. 2MCCh. 7 - Use a pie chart to illustrate the sources that...Ch. 7 - Suppose the free cash flow at Time 1 is expected...Ch. 7 - Use BMs data and the free cash flow valuation...Ch. 7 - You have just learned that B&M has undertaken a...Ch. 7 - Prob. 7MCCh. 7 - Prob. 8MCCh. 7 - Prob. 9MCCh. 7 - What is the horizon value at Year 4? What is the...Ch. 7 - Prob. 11MCCh. 7 - Prob. 14MCCh. 7 - Prob. 15MCCh. 7 - Assume that Temp Force is a constant growth...Ch. 7 - Prob. 17MCCh. 7 - Prob. 18MCCh. 7 - Prob. 19MCCh. 7 - Prob. 20MCCh. 7 - Prob. 21MC
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
- Choose the correct answer with solution. Pls choose only the answer in the choices. Q1. How much is the net cash flow of Gising Company in Year 1?a. 390,000b. 290,000c. 220,000d. 140,000Q2. How much is the terminal value recognized after the three-year forecast period?a. 10,880,000b. 12,466,667c. 13,090,000d. 10,880,000Q3. What is the net Cash flow to the Firm?a. 11,140,489b. 12,103,272c. 12,808,412d. 13,974,000Q4. What is the net cash flow to equity?a. 10,140,489b. 11,103, 272c. 11, 140, 489d. 12, 103, 272arrow_forwardConsider the following project cash flow. YEAR CASH FLOW 0 -1000 1 500 2 500 3 500 4 500 5 500 Use this information to calculate the Internal Rate of Return by linear interpolation(the trial and error method). WITH WORKING PLEASEarrow_forwardOn the basis of the financial information given in this case, complete the WACC table that is prepared for this project . What was the WACC for Atlassian as at 2022? What was the WACC one year earlier? Estimate the important financial information such as the after-tax cost of debt, the risk-free rate, the market risk premium, the cost of equity and the weight of debt and equity. Clearly specify and justify the assumptions and calculations required for these analyses (ie. how did you select the beta, risk-free rate, market return, etc). WACC Calculation for Atlasian 2021 2022 Shares Outstanding (in millions) Share Price Market Value Equity Total Market Value of Debt Total Capital - Atlassian Weight of Debt Weight of Equity Cost of Debt Effective Interest Rate for Atlassian Tax Rate After-tax Cost of Debt Cost of Equity Beta Market risk premium Rf Cost of…arrow_forward
- Solve, a. Calculate the IRR for each of the three cash-flow diagrams that follow. Use EOY zero for (i) and EOY four for (ii) and (iii) as the reference points in time. What can you conclude about “reference year shift” and “proportionality” issues of the IRR method? b. Calculate the PW at MARR=10 % per year at EOY zero for (i) and (ii) and EOY four for (ii) and (iii). How do the IRR and PW methods compare?arrow_forwardProfitability index. Given the discount rate and the future cash flow of each project listed in the following table, , use the PI to determine which projects the company should accept. ..... What is the Pl of project A? (Round to two decimal places.)arrow_forwardDetermine the rate of return for the cash flows shown in the diagram. Use trial and error (start with two trials with 5% and 10% interest rates) and then use interpolation (or more trials) to approximate the result. Roh?? S7000 1- ? Year 590 s90 s90 sz00 sz00 sz00 $3000arrow_forward
- The probability distribution of the returns of two assets, A and B, are shown in the table below. Calculate the covariance between the returns of asset A and asset B. State of Economy Probability of State Return of Asset A Return of Asset B Boom 0.20 40% 5% Normal 0.45 20% 10% Slow Down 0.25 0% 15% Recession 0.10 -20% 30% O-0.3750 -0.0114 0.3750 -50.2500 -2.525arrow_forwardThe possible rates of return of two assets, A and B, under different economic conditions are given below: Economic Situation Probability Return of Asset A Return of Asset B Recession 0.2 10% 6% Stable 0.5 14% 15% Growth 0.3 20% 11% An investor places 50% of his funds in Asset A and 50% in Asset B. [Note: you may use correlation between A and B as 0.2401] Required: (i)Calculate the risk and expected return for each asset. (ii)Calculate the risk and expected return of the investor’s 2-assets portfolio. (iii) What do you understand by total risk?arrow_forwardA process engineer plans on investing $5,000.00 now so that they may withdraw $500.00 a year for 12 years and still have $1,000.00 left in the account at the end of 12 years. a) Sketch the Cash Flow diagram. b) Write the equation for Present Worth of the cash flows in terms of the unknown rate of return. c) Calculate the rate of return on this investment using net present worth analysis techniques. (Hint: use linear interpolation).arrow_forward
- Calculate the EAR of the following investment, entered as a percentage (Example: if your answer is 0.145, enter 14.5) Year Number Cashflow 0 -11400 1 3500 2 3000 3 3100 4 2800 Your Answer:arrow_forwarda firm wants to start a project. a team of financial analysts estimated the following cash flows. Years Cash Flow 0 -$100000 1 55000 2 43000 3 45000 suppose that the discount rate (interest rate) is 12%, the NPV will be?arrow_forwardTake me to the text The following table indicates the net cash flows of a capital asset: Year Net Cash Flow 0 $-12,900 1 $4,100 2 $8,100 Do not enter dollar signs or commas in the input boxes. Use the negative sign where appropriate. Round the factor to 4 decimal places and the NPV to the nearest whole number. Assume the required rate of return is 9%. Determine the net present value of this asset. Year Net Cash Flow Factor Net Present Value $-12,900 0 1 2 Total $4,100 $8,100 SA $ 69arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Financial And Managerial Accounting
Accounting
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:Cengage Learning,
Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY