Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Docile Partners Limited (DPL) has two lines of business, organized as two divisions, A and B. Division A generates a risk-free cash flow. It will
Docile Partners Limited (DPL) has two lines of business, organized as two divisions, A and B. Division A generates a risk-free cash flow. It will produce $1.55 million in free cash flow next year and it will grow at 1.13% each year thereafter forever. The second line of business, run by Division B, is risky. It expects to generate a cash flow of $3.2 million next year and will grow at a rate of 2.08%. Currently, the total market value of DPL is $109.8 million. The term structure of interest rates is flat at 3.29%. Show two decimal places for all your answers. (a) What is the dollar value of Division B? million (b) What is the cost of capital for Division B (in %)? % (c) Assume the company is planning on making an investment which will improve Division B's profitability. This project requires an initial investment of $6.58 million a year from now, and will increase cash flow by $0.98 million starting in year 2, as well as all future cash flows, so that their growth rate after year 2 remains the same as before. Assume that the cost of capital for division B is not affected by this project. If management decides to invest in this new technology, what will the market value of DPL be today (in million $)? million
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started