busn 5000 week 7 hw

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Webster University *

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5000

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Finance

Date

Jan 9, 2024

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docx

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3

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BUSN 5000 Homework 7 Please open this document in Microsoft Word and respond directly in this document without modification of the text in bold. This way the answer will be in the same place and in the same format for every student. You will submit this Word file in Canvas. If you have any trouble, reach out to your instructor in a timely manner. Question 1 – McDonalds is considering purchasing its (hypothetical) rival, Crusty Burger. McDonalds analysts believe the following stream of earnings (profit) is a reasonable estimate. Determine the maximum price McDonalds should pay for Crusty Burger based on the value of earnings alone. You may use whatever discount rate you choose but prepare to justify this choice in the following question. You must show all your work. 10-Year Projected Earnings for Crusty Burger Year 1 $300 Million Year 2 $310 Million Year 3 $320 Million Year 4 $330 Million Year 5 $340 Million Year 6 $350 Million Year 7 $360 Million Year 8 $370 Million Year 9 $380 Million Year 10 $390 Million Provide the appropriate calculation and solution immediately below Answer : The maximum amount McDonald's should pay for Crusty Burger based just on profits is determined by calculating the present value of the expected earnings stream using a selected discount rate. Let us assume an 8% discount rate. Before being added together, the profits from each year will be reduced to reflect their present worth. Year 1: PV = ( $ 300 M )/( 1 + 0.08 ) 1 = ( $ 300 M )/ 1.08 = $ 277.78 M Year 2: PV = ( $ 310 M )/( 1 + 0.08 ) 2 = ( $ 300 M )/ 1.1664 = $ 266.12 M
BUSN 5000 Homework 7 Year 3: PV = ( $ 320 M )/( 1 + 0.08 ) 3 = ( $ 300 M )/ 1.2597 = $ 255.99 M Year 4: PV = ( $ 330 M )/( 1 + 0.08 ) 1 = ( $ 300 M )/ 1.08 = $ 277.78 M Y ear 5: PV = $ 340 M /( 1 + 0.08 ) 5 = $ 340 M / 1.4693 = $ 231.64 M Year 6: PV = $ 350 M /( 1 + 0.08 ) 6 = $ 350 M / 1.5869 = $ 221.02 M Year 7: PV = $ 360 M /( 1 + 0.08 ) 7 = $ 360 M / 1.7138 = $ 210.70 M Year 8: PV = $ 370 M /( 1 + 0.08 ) 8 = $ 370 M / 1.8509 = $ 200.41 M Year 9: PV = $ 380 M /( 1 + 0.08 ) 9 = $ 380 M / 1.9997 = $ 190.02 M Year 10: PV = $ 390 M /( 1 + 0.08 ) 10 = $ 390 M / 2.1619 = $ 180.24 M Adding all the earnings: PV(Earning) = PV(1yr+2yr+3yr+4yr+5yr+6yr+7yr+8yr+9yr+10yr) PV(Earning) = 277.78 +266.12+255.99+277.78+231.64+221.02+210.70+200.41+190.02+180.24 PV(Earning) = $ 2334.25 M Question 2 – Provide an executive summary justifying a maximum purchase price. Be sure to justify your choice of discount rate in your summary. Do not quote directly from any source including ChatGPT. Rely on your own reasoning. Limit 300 words Answer: The maximum amount McDonald's should pay for Crusty Burger based just on profits is determined by calculating the present value of the expected earnings stream using a selected discount rate. Let us assume an 8% discount rate. Before being added together, the profits from each year will be reduced to reflect their present worth. First of all, the opportunity cost of capital and the risk associated with investing in Crusty Burger are taken into consideration by the discount rate. A greater discount rate would suggest a significant amount of risk and lead to a lower valuation. Conversely, a lower discount rate would indicate less risk and result in a higher valuation. We believe that an 8% discount rate strikes an appropriate balance given the average risk associated with purchases made by similar sector participants. Secondly, the long-term average return on investment in the market is consistent with a discount rate of 8%. It takes into consideration the potential profits that investors may make by moving their money in a different direction.
BUSN 5000 Homework 7 It is important to note that while calculating the maximum purchase price based only on profits, other qualitative factors like possible synergies, brand value, market positioning, or operational savings that may emerge from the acquisition are not taken into account. These factors may, in fact, justify a higher purchase price.
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