Use the Following financial information to answer questions 1 through 4. Year 1 Year 2 Year 3 Year 4 Year 5 Revenue $500.00 $625.00 $750.00 $900.00 $1,035.00 Net Income $20.00 $68.00 $144.00 $180.00...

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Answered Same DayOct 22, 2021

Answer To: Use the Following financial information to answer questions 1 through 4. Year 1 Year 2 Year 3 Year 4...

Charanjeet answered on Oct 23 2021
126 Votes
Use the Following financial information to answer questions 1 through 4.
 
    
    
    Year 1
    Year 2
    Year 3
    Year 4
    Year 5
    Reve
nue
     $500.00
     $625.00
     $750.00
     $900.00
     $1,035.00
    Net Income
     $20.00
     $68.00
     $144.00
     $180.00
     $212.40
    Total Cash Flow
     $(10.00)
     $15.50
     $59.00
     $80.00
     $98.90
**Assume in all questions that the company pays 100% of its cash flow back to its investors in the form of a dividend.
 
Question 1. Assuming that the company is liquidated in year 5 and does not produce net income or cash flows after year 5, what is the present value of the firm today (in Year 0) if investors expect a yearly return of 20%?
Ans: The question is solved by free cash flow to equity method
V0 = (FCFE1/(1+k)1)+ (FCFE2/(1+k)2)+ FCFE3/(1+k)3+ (FCFE4/(1+k)4)+ FCFE5/(1+k)5
= (20/ (1+0.20) 1) + (68/ (1+0.20)2) + 144/ (1+.20)3+ (180/ (1+k.20)4) + 212.40/ (1+.20)5
= 319.39
Question 2. Now assume that company will not be liquidated at the end of year 5, and the company's net income and cash flow grow by 10% from year 5 to year 6, and then remain flat thereafter until perpetuity.  If investors now expect a yearly rate of return of 8% starting in year 6, and there are 100 shares of...
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