Question

In: Finance

You have to value a company based on its expected future cash flows. Interest rates are...

You have to value a company based on its expected future cash flows. Interest rates are currently 9%. If this company expects cash flow of $100000 next year (it is the end of year 0 or equivalently the beginning of the first year), growing at 7.8% each year until the end of the fifth year. Then, cash flow growth is expected to slow to 1.9 forever-after. What is the value of this company today, in thousands of dollars?

Solutions

Expert Solution

Value of the company today based on the future expected cash flows is calculated by arriving at the present value of given future cash flows. Present value of growing perpetuity is calculated by dividing first cash flow at a particular growth rate with the discount rate minus the growth rate. If cash flow is expected to grow at the rate g forever after and our first cash flow at that rate is C and our interest rate is r then present value of growing perpetuity will be = C / (r - g).

Calculation of the value of the company today is shown below -

Thus, value of the company today is $2,673 thousand.

Formulas used in the above table are presented as follows -

I hope this solution will help you in your task. Thank you.


Related Solutions

Below are the expected cash flows and interest rates for the next nine years. Cash flows...
Below are the expected cash flows and interest rates for the next nine years. Cash flows will occur at the end of the nominated years. Cash Flows Interest Rates Year 0 Years 1 - 2 8% Year 1 Year 2 +$ 6,500 Year 3 +$ 1,500 Years 3 – 8 6% Year 4 Year 5 Year 6 -$ 2,500 Year 7 Year 8 Year 9 +$ 10,000 Years 9 - 10 7% Year 10 i. Using the Table function within...
Interest rate = 6.5%, calculate the future value of the following cash flows
Interest rate = 6.5%, calculate the future value of the following cash flows Years:                          0                      1                      2                      3                      4 |                      |                      |                      |                      | Cash Flows:                 $0                   $75                  $225                  $0                  $300 a.   $526.0 b.   $553.7 c.    $582.8 d.   $645.8
Changes in the spot rates can: a. affect a firm's present value of future cash flows,...
Changes in the spot rates can: a. affect a firm's present value of future cash flows, posing economic risk. b. impose translation risk on a firm. c. impose accounting risk on a firm. d. affect the value of a company's future cash transactions, posing transaction risk.
Present and Future Values of Single Cash Flows for Different Interest Rates Use both the TVM...
Present and Future Values of Single Cash Flows for Different Interest Rates Use both the TVM equations and a financial calculator to find the following values. Round your answers to the nearest cent. (Hint: Using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown variable. Then, without clearing the TVM register, you can "override" the variable that changes by simply entering a new value for it and then pressing the...
Present and Future Values of Single Cash Flows for Different Interest Rates Use both the TVM...
Present and Future Values of Single Cash Flows for Different Interest Rates Use both the TVM equations and a financial calculator to find the following values. (Hint: If you are using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown variable. Then, without clearing the TVM register, you can "override" the variable that changes by simply entering a new value for it and then pressing the key for the unknown...
Explain how the practice of calculating the present value of expected future cash flows can assist...
Explain how the practice of calculating the present value of expected future cash flows can assist you in your next salary negotiation; or perhaps discuss how you would use (in the future or have used in the past) NPV calculations of future personal income earning potential when evaluating the decision to pursue an advanced academic degree.
Calculate the net present value at year 0 for the following cash flows and interest rates...
Calculate the net present value at year 0 for the following cash flows and interest rates compounded semi-annually (rounded $ to two places after the decimal). The year 0 cash flow is $373, the year 1 cash flow is $200, and the year 2 cash flow is $-147. The interest rate for the first period (year 0 to 1) is 3% and the interest rate for the second period (year 1 to 2) is 4.5%.
Based on the following cash flows, find the future value in year 9. Assume deposits were...
Based on the following cash flows, find the future value in year 9. Assume deposits were made at the end of the year and the rate of return is 15%. Year 1 4 9 Cash Flows 9,000 4,000 1,000
Problem 4-10 Present and Future Values of Single Cash Flows for Different Interest Rates Use both...
Problem 4-10 Present and Future Values of Single Cash Flows for Different Interest Rates Use both the TVM equations and a financial calculator to find the following values. Round your answers to the nearest cent. (Hint: Using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown variable. Then, without clearing the TVM register, you can "override" the variable that changes by simply entering a new value for it and then...
The price of a security is the…?A the present value of all future cash flows....
The price of a security is the…?A the present value of all future cash flows.B sum of all future profits.C the future value of all the future profits net of interest payments and taxes.D the future value of all current dividends. geometric average of all past prices.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT