Answered step by step
Verified Expert Solution
Question
1 Approved Answer
The problems in Part 1 cover present value calculations (we started the semester with these calculations). These problems cover two stage valuation the topic covered
The problems in Part 1 cover present value calculations (we started the semester with these calculations). These problems cover two stage valuation the topic covered before the Spring Break). In these problems it is important and helpful to draw timelines. It is also important to identify the periodicity of a problem. That is, before using an annuity or a perpetuity formula, you should identify is the problem monthly, semi-annual, annual? Question 1. [Total: 8 Points) Two Stage Valuation. Drawing a timeline will help solve this problem. Investing in a troubles business. You are buying a business that has been losing money. Next year (at t = 1) you will need to invest $100 into the business (to cover losses). You will be making contributions at t = 2, t = 3, t = 4, t = 5. The contributions are declining at 20% from year to year (for example, your contribution at t = 2 is $100*(1-0.2) = $80). At t = 6 the business will have zero profits (your cash flow at t = 6 is zero). At t = 7 you will receive first profits of $90. Profits will be paid forever and will grow at an annual rate of 7%. The discount rate is 12% per year. [3 points Stage one. What is the Present Value (at t = 0) of all your investments during the first stage? (You are calculating the present value of payments made at t = 1, 2, 3, 4, 5). [3 points Stage two. What is the Present Value (at t = 0) of all your profits. (You are calculating the present value of payments received, which are profits, from t=6 to infinity). [2 points) Total. What is the value of this business at t = 0
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