Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

PLEASE READ: I only have 10 dollars for this. Please do not suggest a price change, if you cannot do it for 10, then just

PLEASE READ: I only have 10 dollars for this. Please do not suggest a price change, if you cannot do it for 10, then just ignore it because i have no more money. See the file attached, thats all i need done. please show work.image text in transcribed

HW 1 Answers should be entered directly into the dialog box Excel files can be attached to show calculations. EXCEL spreadsheets should be formatted and easy to follow. Understanding Rates of Return 1. How much are you willing to invest today to receive $150 a year for seven years and an additional $1,200 at the end of the seventh year? Assume this investment is low risk, that is, no riskier than putting money in a bank earning 2%. 2. Now assume that the likelihood of receiving the future cash flows is risky. The risk level is moderate. How much are you willing pay for this investment? Calculate the new rate of return. Is this new rate of return an expected rate of return, a required rate of return or a realized rate of return? Can also be several of the above. 3. You must choose between two investments where the likelihood of receiving the expected cash flows is the same. What is the expected rate of return for Investments A & B? Use your time value calculator and EXCEL. Make sure you get the same answers. Which one do you prefer? Explain. Year 0 1 2 3 4 5 6 7 8 Investment Investment A B -$600 -$600 0 $ 32 0 32 0 32 0 32 0 32 0 32 0 32 $ 886 613 Value Creation and Expectations 4. Assume a business has been started with an investment of $500,000 with an expected annual cash flow of $70,000. Cash flow is expected to grow @ 4% per annum. The business owner has a required rate of return of 16% What is the market value of equity at time period 0. Show your answer using both the Gordon Model and forecasting out cash flows for 200 years. 5. After seven years of generating the expected cash flow the current owner sells the business with no change in expectations. What will the business sell for in year 7 and what rate of return will she have earned. 6. Now assume that after seven years of generating the expected cash flow the current owner and the potential buyer expects cash flow to grow @ 5% per annum starting in year 8. What will the business sell for and what rate of return will the business owner have earned. 7. Cash flows have followed the pattern above (question 6). At the end of year 12, the new owner sells the business. The new buyer expects cash flows to continue to grow @ 5% per annum. What will the business sell at the end of year 12 for and what rate of return will the seller realize? 8. Summarize how expectations impact firm value and return earned by buyers and sellers

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Introduction To Finance Markets, Investments, And Financial Management

Authors: Ronald W. Melicher, Edgar A. Norton

17th Edition

1119561175, 978-1119561170

More Books

Students also viewed these Finance questions

Question

How is a bivariate outlier identified in a scatterplot?

Answered: 1 week ago

Question

Determine miller indices of plane X z 2/3 90% a/3

Answered: 1 week ago

Question

3. Avoid making mistakes when reaching our goals

Answered: 1 week ago