Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

To start up a business its founders must invest as follows: Year : 0 1 2 3 4 Investment: $ 4 , 0 0 0

To start up a business its founders must invest as follows:
Year : 01234
Investment: $4,000,800 $2,000,400 $1,000,200 $500,100 $250,050
Following the times when you are investing, the business is projected to make positive cash flows. For year 5, the cash inflow is expected to be $16,300 and this is expected to triple each year ending with the cash flow that occurs at year 10. In year 11 and into the future, the cash flows are expected to grow at a rate of 2% per year (and continuing in perpetuity).
c) Suppose the owners of the business do a public offering of the business on the stock market at the end of year 4(just after the last investment cash flow) and the market has the same expectations of future cash flows (as stated above for years 5 onward).
i) What will be the market price of the business when it goes public (at year 4)?
ii) What would be the present value of this amount discounted back to year 0?
iii) What does this imply about the economic profit expected to be received by the people who buy the stock in the public offering?

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

Finance A Quantitative Introduction Volume 1

Authors: Piotr Staszkiewicz, Lucia Staszkiewicz

1st Edition

0128015845, 978-0128015841

More Books

Students also viewed these Finance questions