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how would the valve of a firm be affected by the following events? a. the introduction...

how would the valve of a firm be affected by the following events?

a. the introduction of a new product designed to increase the firm cash inflow is delayed by one year. the size of the expected cash flow is not affected.

b. a firm announced to the press that its cash earning for the coming year will be 10 percent higher then previously forecast.

Solutions

Expert Solution

a. If the firm's cashflow is delayed by one year, the discounted cashflow falls results in decrease in the value of the firm. For example, $10000 has to come in 3 year, but postponed to 4th year. Assume 10% discount rate.

Discounted cashflow from 3 years=10000/(1+10%)^3=7513.15

Discounted cashflow from 4 years=10000/(1+10%)^4=6830.13

So, the value of the firm falls if delayed by one more year.

b. The value of the firm increases, if the cashflow is going to increase by 110% because of higher numerator value while discounting the cashflows.

jeff jeffy answered 2 years ago
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