Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Two companies company A and B are identical in their products and sales. For the next 1 0 years sales revenue of A and B

Two companies company A and B are identical in their products and sales. For the next 10 years sales revenue of A and B will be $100 million per year. The operating expense for both companies is $50 million per year. Operating expenses are all paid right away in cash. Company A is better at collecting payment for its sales and collects all the sales at the end of each year. Company B only collects 60% of its sales in the current year. The remaining balance is collected at the end of the following two years. Also, operating expenses on sales revenue no longer exist after 10 years. Ignore other costs and taxes. Both companies face a discount rate of 10% per year.
2
a) Draw a timeline (or a table) of the net cash flow of company A and its accounting net income each year for the next 10 years. Note: accounting net income only concerns revenue and expenses.
b) What is the valuation of company A?(Hint: valuation is the present value of all the future cash flows at time zero; refer to chapter 5 of the textbook for a review of present value)
c) Draw a timeline (or a table) of the net cash flow of company B and its accounting net income each year for the next 12 years.
d) "Because the net income of A and B is the same, the valuation of A and B is the same." Evaluate this statement with supporting calculations.
image text in transcribed

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

Financial Analysis With Microsoft Excel

Authors: Timothy R. Mayes

9th Edition

0357442059, 9780357442050

More Books

Students also viewed these Finance questions