ent Four (A) a) You are evaluating the potential purchase of a small business currently generating $42,500 of after-tax cash flow. On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm’s value using several possible assumptions about the growth rate of cash flows. (i) What is the firm’s value if cash flows are expected to grow at an annual rate of 0% from now to infinity? (ii) What is the firm’s value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity? (iii) What is the firm’s value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 7% from year 3
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
Assignment Four (A)
a) You are evaluating the potential purchase of a small business currently generating $42,500
of after-tax cash flow. On the basis of a review of similar-risk investment opportunities,
you must earn an 18%
uncertain about future cash flows, you decide to estimate the firm’s value using several
possible assumptions about the growth rate of cash flows.
(i) What is the firm’s value if cash flows are expected to grow at an annual rate of 0% from
now to infinity?
(ii) What is the firm’s value if cash flows are expected to grow at a constant annual rate of
7% from now to infinity?
(iii) What is the firm’s value if cash flows are expected to grow at an annual rate of 12%
for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
