Smooth-tone products manufactures sound sytems. the companys weighted average co
ID: 2465457 • Letter: S
Question
Smooth-tone products manufactures sound sytems. the companys weighted average cost of captial is 15%. The company forecasted the following free cash flows for the next 20 years.
Year Free cash flows
1 10,000,000
2 15,000,000
3 20,000,000
4. 22,000,000
5 25,000,000
6-10 20,000,000 per year
11-20 15,000,000 per year
Use the discounted cash flow approach to value the smoothtone products company.
Explanation / Answer
Solution:
Year
Free Cash Flows
PV factor @ 15%
Present Value
1
$10,000,000
0.870
$8,695,652
2
$15,000,000
0.756
$11,342,155
3
$20,000,000
0.658
$13,150,325
4
$22,000,000
0.572
$12,578,571
5
$25,000,000
0.497
$12,429,418
6-10
$20,000,000 per year
1.667
$33,332,000
11-20
$15,000,000 per year
1.241
$18,608,445
Present Value of Cash Flows
$110,136,567
Note: Year 6 – 10 --- Sum of Present Value factor @ 15% from year 6 to 10 years used
Year 11 – 20 ----- Sum of Present Value factor @ 15% from Year 11 to 20 years used
Year
Free Cash Flows
PV factor @ 15%
Present Value
1
$10,000,000
0.870
$8,695,652
2
$15,000,000
0.756
$11,342,155
3
$20,000,000
0.658
$13,150,325
4
$22,000,000
0.572
$12,578,571
5
$25,000,000
0.497
$12,429,418
6-10
$20,000,000 per year
1.667
$33,332,000
11-20
$15,000,000 per year
1.241
$18,608,445
Present Value of Cash Flows
$110,136,567
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