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You are evaluating the potential purchase of a small business currently generating $45,000 of after-tax cash flow (D0 = $45,000). On the basis of a review of similar-risk investment opportunities, you must earn an 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 9% from now to infinity?
c. What is the firm’s value if cash flows are expected to grow at an annual rate of 13% for the first 2 years, followed by a constant annual rate of 9% from year 3 to infinity?
Suppose that you are the manager of a bank whose $100 billion of assets have an average duration of four years and whose $90 billion of liabilities have an average duration of six years. Conduct a duration analysis for the bank, and show what will ha..
One year ago, you puchased 94 shares of ABC stock for $20.9 per share. During the year, you received a dividend of $3.2 per share. Today, you sold all your shares for $25.3. What are the percentage return on your investment
Marston Marble Corporation is considering a merger with the Conroy Concrete Company. Conroy is a publicly traded company, and its beta is 1.30. Conroy has been barely profitable, so it has paid an average of only 20% in taxes during the last several ..
One defect of the IRR method vs. the NPV is that the IRR does not take account of cash flows over a project’s full life. One defect of the IRR method vs. the NPV is that the IRR does not take account of the time value of money. One defect of the IRR ..
Ernie Manufacturing has projected sales of $155 million next year. Costs are expected to be $100 million and net investment is expected to be $17.5 million. Each of these values is expected to grow at 14 percent the following year, with the growth ra..
In case of conflict, one should always choose the IRR method (over the NPV method) because the IRR is inherently superior to the NPV method. For capital budgeting and cost of capital purposes, the firm should assume that each dollar of capital is obt..
Consider the following spot interest rates for maturities of one, two, three, and four years. r1 = 3.8% r2 = 4.2% r3 = 4.9% r4 = 5.7% Assuming a constant real interest rate of 2 percent, what are the approximate expected inflation rates for the next ..
Determine the Marginal profitability of additional sales, Cost of additional investment in receivables, Additional bad-debt loss and Cost of additional investment in inventory.
Expected Return XYZ College is evaluating making an investment with a portion of the principle from its endowment fund. Calculate the investment's expected return if there's a 40% probability of a 10% return, a 30% probability of a 9% return, and a 1..
Compute the price of an American call option with strike K=110 and maturity T=.25 years. If your answer to Question 3 is "Yes", when is the earliest period at which it might be optimal to early exercise? (If your answer to Question 3 is "No", then yo..
In December of 2005, the Eastman Kodak Corporation (EK) had a straight bond issue outstanding that was due in eight years. The bonds are selling for 108.126%, per bond and pay a semiannual interest payment based on 7.25% (annual) coupon rate of inter..
Apply what you have learned about qualitative and quantitative risk analysis to a scenario of your choosing Some examples would be home improvement project, changing jobs, vacation plans The purpose of this activity is to simplify the subject and as..
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