Question
I have a question regarding this problem: Here is the info: -There's a startup called MACKing. This new business in the market is being evaluated
I have a question regarding this problem:
Here is the info:
-There's a startup called "MACKing". This new business in the market is being evaluated by the peeps that started it at date 0. Date 0 is also the start of thegrowth period. This growth period (g) will last for five years only!
-After the g period, MACKing will dive into the early-maturity period (e-m). This new period lasts fifteen years! Note how the e-m period usually lasts more.
-After MACKing finishes the e-m period, MACKing enters thelate-maturity period forever and ever.
Here are a couple of assumptions that may help.Try and read them carefully and consider them:
-In the g period, the growth rate of invested capital is 100%. Yes, 100%! Also, the return on invested capital (r) is 10%, and the required rate of return (ROIC) is 20%.
-Now, in the e-m period things change. The growth rate is 10%, the ROIC is 50%, and r is 12%.
-However, in the late-maturity period, the growth rate is now 3%, ROIC is 8% and r is also 8%. $3 million is the amount of invested capital in MACKing at the beginning of the growth period.
Questions:
1. What is the economic value att= 0 of the free cash flows MACKing will generate during the g period (the first 5 years)?
2. What is the economic value at t= 0 of the free cash flows MACKing will generate during the e-m period (the subsequent 15 yrs)?
5. Suppose the grwoth rate changes to 15% in the last period. By how much did the economic value of MACKing change at time zero? Calculate and explain the result using one or two sentences.
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