Question

Seashore Corp. estimates their future free cash flows as followed: Year 1: $10,000; Year 2: $11,600; Year 3: $12,000; and they expect a 5% growth rate beyond year 3. If the required rate of return is 14%:

26) What is their terminal value in Year 3?

A.) $140,000

B.) $133,333

C.) $152,000

D.) $120,293

What is a fair stock price per share of Seashore Corp. if they have $57,000 in debt and 2,400 shares outstanding?

A.) $41.93

B.) $34.58

C.) $26.37

D.) $19.22

If a seashore employee started to contribute to her 401k retirement account. She determines to deposit $200 every month and the retirement fund earns 9% APR. How much will she have in her retirement account in 40 years from now?

A.) $936,264

B.) $597,288

C.) $720,262

D.) $259,281

Answer 1

Answer to Question 1:

FCF1 = $10,000
FCF2 = $11,600
FCF3 = $12,000

Growth Rate = 5%
Required Return = 14%

FCF4 = FCF3 * (1 + Growth Rate)
FCF4 = $12,000 * 1.05
FCF4 = $12,600

Horizon Value = FCF4 / (Required Return - Growth Rate)
Horizon Value = $12,600 / (0.14 - 0.05)
Horizon Value = $12,600 / 0.09
Horizon Value = $140,000

Answer to Question 2:

Value of Firm = $10,000/1.14 + $11,600/1.14^2 + $12,000/1.14^3 + $140,000/1.14^3
Value of Firm = $120,293.42

Value of Equity = Value of Firm - Value of Debt
Value of Equity = $120,293.42 - $57,000
Value of Equity = $63,293.42

Price per share = Value of Equity / Number of shares
Price per share = $63,293.42 / 2,400
Price per share = $26.37

Answer to Question 3:

Monthly Deposit = $200

Annual Interest Rate = 9.00%
Monthly Interest Rate = 9.00% / 12
Monthly Interest Rate = 0.75%

Time Period = 40 years or 480 months

Accumulated Sum = $200*1.0075^479 + $200*1.0075^478 + …. + $200*1.0075 + $200
Accumulated Sum = $200 * (1.0075^480 - 1) / 0.0075
Accumulated Sum = $200 * 4,681.32027
Accumulated Sum = $936,264