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Question : You are the head of the acquisitions department of a company. A potential investment in Peltier Devices, Inc (PDI) is currently under review.
Question :
| You are the head of the acquisitions department of a company. A potential investment in Peltier Devices, Inc (PDI) is currently under review. The following information regarding the company is available. PDI is a private company that imports small dehumidifiers that remove excess moisture from the air, and sells them domestically. The product works well for small rooms and closets. The technology is based on the Peltier effect whereby an electrified junction between two materials emit or absorb heat, and is not proprietary. The firm has a first mover advantage, which will likely erode over time. The firm has been in operation for two years. Below is some information about the projections. | ||||||||||
| Cash flow projections: | ||||||||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | ||||||
| Future cash flows | $300 | $1,448 | $965 | $808 | $1,948 | |||||
| Assumptions: | ||||||||||
| Beta | 1.28 | |||||||||
| Cost of debt | 4% | |||||||||
| Market equity risk premium | 5% | |||||||||
| E/V | 80.00% | |||||||||
| D/V | 20.00% | |||||||||
| Risk-free rate | 3.00% | |||||||||
| Tax rate | 40% | |||||||||
| Terminal value* | $41,335 | |||||||||
| Terminal date | Year 5 | |||||||||
| *The terminal value of a company is the present value at a future date of all future cash flows expected once the company reaches perpetual stable growth. This amount must be discounted at the same discount rate as the other cash flows to determine its current present value. Hence, this amount should be considered as a projected cash flow amount at the terminal date. The terminal value of a company is covered in more depth in Module 7. | ||||||||||
| Answer the following questions based on this information in the corresponding answer tabs provided: | ||||||||||
| Question 1 | ||||||||||
| Calculate the weighted average cost of capital (WACC) for PDI. | ||||||||||
| Question 2 | ||||||||||
| Calculate the discounted cash flow value for PDI. | ||||||||||
| Question 3 | ||||||||||
| Use your calculated answers to advise the board on the feasability of the investment by interpreting the results with reference to risk and return. (Max. 150 words) | ||||||||||
Answer : I have prepared the answer which is as follows, Please go through this and suggest if this is correct if not guide me the same
Answer #1
| Calculate the weighted average cost of capital (WACC) for PDI. | ||||
| E/V | 80.00% | |||
| Cost of equity | 9.40% | |||
| Risk-free rate | 3.00% | |||
| Beta | 1.28 | |||
| Market equity risk premium | 5.00% | |||
| D/V | 20.00% | |||
| Cost of debt | 4.00% | |||
| Corporate tax rate | 40.00% | |||
| WACC | 8.0% | |||
Answer #2
| Assumptions | ||||||
| Discount rate (calculated in answer to Question 1) | 8.00% | |||||
| Terminal value | $41,335 | |||||
| Free cash flow projection | ||||||
| Calculations End of Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Free cash flow | $300 | $1,448 | $965 | $808 | $1,948 | |
| Present value of FCF | $277.78 | $1,241.43 | $765.89 | $593.76 | $1,325.78 | |
| Sum of FCF PV | $4,204.63 | |||||
| Terminal value | ||||||
| Present value of terminal value | $28,131.91 | |||||
| Total value of PDI | $32,336.53 | |||||
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Collectible Investments For The High Net Worth Investor
Authors: Stephen Satchell
1st Edition
0123745225,0080923054
