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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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  $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%? 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 outstanding stock, what will the price per share of the company's stock at the end of year 5/beginning of year 6?  **Hint to find the per share stock price you will first need to find the total value of the firm at the end of year 5/beginning of year 6. Question 3. Again 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.  However, now assume that after year 6 the company's net income and cash flow will grow by 3% per until perpetuity.  Again, If investors expect a yearly rate of return starting in year 6 of 8% and there are 100 shares of outstanding stock, what will now be the price per share of the company's stock at the end of year 5? Question 4. Based on the assumptions from questions 1 and 3, what is the total value of the firm today in year 0.  Hint, the answer to this question is not as simple as adding together the two values of the firm that you calculated in question 1 and 3.  Remember, the answer that you calculated in question 3 is derived from the projected value of the firm in year 5 and not year 0. Question 5. Company X issues a 3-year bond with $1,000 par value and a 7% coupon rate that is paid annually.  If the investor expects a 5% return for similar corporate bonds with the same maturity, what is the price that the investor is willing to pay for this bond? Question 6. Now assume that Company X issues the same 3-year bond with a $1,000 par value and a 7% coupon rate that is paid quarterly (4 payments per year).  Again,  If the investor expects a 5% return for similar corporate bonds with the same maturity, what is the price that the investor is willing to pay for the bond?   Show your work at the end thank you
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
125 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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