Time Value of Money A. Calculate the following time value of money figures: 1. C
ID: 2794357 • Letter: T
Question
Time Value of Money
A. Calculate the following time value of money figures: 1. Calculate the present value of the company based on the given interest rate and expected revenues over time. 2. Suppose the risk of the company changes based on an internal event. Recalculate the present value of the company. 3. Suppose that a potential buyer has offered to buy this company in five years. Based on the present value you calculated above, what would be a reasonable amount for which the company should be sold at that future time?
B. What are the implications of the change in present value based on risk? In other words, what does the change mean to the company, and how would you, as a financial manager, interpret it? Be sure to justify your reasoning.
C. Based on the future value of the company that you calculated, and being mindful of the need to effectively balance portfolio risk with return, what recommendation would you make about purchasing the company as an investment at that price? Be sure to substantiate your reasoning.
Free Cash flows =Fiscal Year Capital Leases Operating Leases (FY 15) Free Cash Flows: FCF 1- FCF 5 in millions 2015- $ 113,000 2016 -111,000 2017 -108,000 2018 -101, 000 2019 -97, 000
1. 8%
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Explanation / Answer
Soln : A-1) Let PV be the present Value as per the given data ,
PV = 113000/1.08 + 111000/1.082 + 118000/1.083 +101000/1.084 + 97000/1.085
PV = 104629.63 + 95164.61 +85733.88 + 74238.02 +66017.57 = $425782.71
A-2) In case if the risk changes internally, it will not affect the cash flows and discount rate.
A-3) If the buyer wants to buy the company after 5 years, it should be sold with a value V = 425782.71 *1.08^5
V = $625614.58
B) In case if the risk increases, market risk as it is known the more the risk the more return will be expected. So, the discounting rate will increase and hence, the present value of cash flows will go down.
As risk will increase, it can make losses more probably and depends on company management, if it would like to continue with the project or sell it to someone. Risk increase would ask buyers to pay less for the company, ie. valuation of company will reduce as the PV goes down.
C) With the given future value calculated above and if risk increases, the valuation to be considered again and at lower value, as risk return should be balanced on that basis. So, at the given price , valuation is higher and lower price is to be quoted.
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