You own a wholesale plumbing supply store. The store currently generates revenue

Question

You own a wholesale plumbing supply store. The store currently generates revenues of $1.03

million per year. Next year, revenues will either decrease by 9.9%or increase by 4.6%, with equal probability, and then stay at that level as long as you operate the store. You own the store outright. Other costs run $880,000 per year. There are no costs to shutting down; in that case you can always sell the store for $540,000.

What is the business worth today if the cost of capital is fixed at 9.8%?

(Hint: Make sure to round all intermediate calculations to at least four decimal places.)

Explanation / Answer

Scenario 1 Scenario 2 Decrease Increase Rate of increase/ decrease 9.9000% 4.6000% Current revanue 103000000.0000% 103000000.0000% Expected revanue 92803000.0000% 107738000.0000% Less other costs 88000000.0000% 88000000.0000% Free cash flows (FCFF1) 4803000.0000% 19738000.0000% Cost of capital (Re) 9.8000% 9.8000% Value of business = FCFF1/Re 49010204.0816% 201408163.2653% Vaue of shutting down 54000000.0000% 54000000.0000% (It is less then value of firm therefore firm should not be shutdown) Expected value of firm - Prob. Of scenario 1 X Value of Scenario 1 + Prob. Of scenario 2 X Value of Scenario 2 490102 x 0.5 + 490102 x 0.5 = 1252091.8367 Please provide feedback……... thanks in advance……… :-)

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.