Questions Question I What is the Present Value of 7 500 received in: a. 3 years from now (at a discount rate of 3%)? b. 6 yea rs from now (at a discount rate of 6%)? c. Of an annuity of l 2 years (at a discount rate 9%)? Question 2 Congratulations! You won the lottery and you are asked to choose between two options: i) Receive 5 000 monthly for the next 10 years or ii) receive today the lumpsum amount of 500 OOO. Knowing that long-term interest rates (annual) are 1%, what proposition should you accept? Solution: QUESTION 3 After Covidl 9, you decided to buy a house in the south of France for your retirement. After carefully studying the market, the estimated value of a big house is 750 000 euros., and you decide to open a savings account. You want to have in 10 years one third of the value. Assume that long term interest rates are 1%, how much do you have to save annually, assume a constant amount? After realising that you will have to save way too much annually, you decided to look for more lucrative (and also riskier!) investment opportunities. You know that the stock market offers on average 8% return annually. How much will you have to save, assuming a constant amount? Question 4 You are the CFO of tech company multinational that is planning to make some acquisitions of big tech firms in the US. The finance department has estimated the following cash fl ows if the firm makes the acquisition'. Assume that the appropriate discount rate for the technology sector in the US is 10%. Table: Estimated cash fl ows W m m m 1 For simplification purposes ignore the residual value in this question. WhaT is The maximum amounT ThaT The firm should pay for acquiring The companies? Question 5 AfTer carefully analysing The invesTmenTs in The US (QuesTion 4), you quickly realise ThaT These companies are quiTe expensive. Therefore, you are Turning To The EU markeT and you are esTimaTing The value of a poTenTial acquisiTion. The esTimaTed cash flows for The nexT years are on The Table below. Table: EsTimaTed cash flows Year I 2 3 4 Cash flow 10 T5 20 25 NoTes: AfTer year 3, There is no expecTaTion ThaT cash flows will change. The company is risky, and you are noT 100% sure abouT The esTimaTed cash flows. You Therefore assume a discounT raTe of 12%. Q]: WhaT is The residual value2 of firm in year 4? Q2: WhaT is The value of The firm? Question 6 During Covidi 9, companies are in desperaTe need for cash To meeT Their shorT-Term dest. Unilever is one of Them and is planning To divesT some brands in iTs porTfolio. AfTer a careful analysis, The execuTive commiTTee decided To consider The divesTiTure of Three brands. The finance deparTmenT has esTimaTed The expected cash flows for each brand: Consider ThaT The appropriate discounT raTe for The consumer goods sector is 8%. Assume no residual value in This auesTion. Table: EsTimaTed cash fl ows Firm\year I 2 3 4 5 Lipton 30 40 50 60 7O CorneTTo 25 45 45 65 70 Dave 75 55 45 30 20 Q: WhaT is The amounT ThaT Unilever should geT for selling iTs brands? 2 The residual value is the value at the end of The project/valuation period and equals the present value of the remaining cash flows. Question 7 After living the successful entrepreneurial life and building a quite successful company that offers car repairment services, you are considering selling it for your retirement. You asked an advisory firm to help you with the valuation to estimate how much you would get. They prepared a business plan with the expected cash flows for the coming years as shown on the table below: Table: Estimated cash fl ows Year 1 2 3 4 5 Cash flow 25 30 35 40 50 From year i to year 5, you agree on the estimation of cash flows prepared by the advisory firm. After year 5, you believe that the cash flows will continue to grow at a steady of 3% each year (case n0 l l. The advisory firm is more pessimistic as they think that the cash flows will remain constant after year 5 {case n2). Assume a discount rate of 8%. Q]: What is the residual value of firm in year 5 in both hypotheses? Q2: What is the value of the firm? Question 8 A famous French TV show3 promises to offer a premium of 1 .000.000 euros by making a payment of 50,000 per year for 20 yea rs if the public calls. What is the present value of such amount? Assume a discount rate of a) l % b) 3% 3 htt 5- www tfl fr tf a pants-re lementsremboursement-des-'euxtv news etits- latsen-e uilibre