3). Using the following free cash flow data: Year 2019 2020 Cash Flow $3,000,000 $3,400,000 a. Calculate the growth in cash flow between 2019 and 2020 b. Prepare a 5 year cash flow forecast based upon the rate of growth in cash flow (2021- 2025)
3). Using the following free cash flow data: Year 2019 2020 Cash Flow $3,000,000 $3,400,000 a. Calculate the growth in cash flow between 2019 and 2020 b. Prepare a 5 year cash flow forecast based upon the rate of growth in cash flow (2021- 2025)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Subject : Accounting
Transcribed Image Text:c. Calculate the net present value of the forecasted cash flows assuming an investment
cost of $18,500,000 in the beginning of 2021
Estimate cost of capital using the following data:
• Market value of debt - $600,000
• Market value of equity - $1,400,000
• Current yield on debt - 7.3%
• Tax rate-35%
● Expected market return - 12%
• Current 10 year US Treasury -3.8%
Beta-2.1
d. State your opinion on whether you would make the investment and why?
Transcribed Image Text:3). Using the following free cash flow data:
Year
Cash Flow
2019
$3,000,000
2020
$3,400,000
a. Calculate the growth in cash flow between 2019 and 2020
b.
Prepare a 5 year cash flow forecast based upon the rate of growth in cash flow (2021-
2025)
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Step 1: Net Present Value and cost of capital
VIEWStep 2: Calculation of growth in cash flow between 2019 and 2020
VIEWStep 3: Forecast 5 years cash flow based on growth rate
VIEWStep 4: Calculation of overall cost of capital
VIEWStep 5: Calculation of Net Present Value
VIEWStep 6: Explanation on Decision Making
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