Consider the table given below to answer the following question. Year Asset value Earnings Net investment Free cash flow Return on equity Asset growth rate Earnings growth rate 1 9.00 1.44 1.44 0.00 0.16 0.16 Present value 2 10.44 million 1.67 1.67 0.00 0.16 0.16 0.16 3 12.11 1.94 1.94 0.00 0.16 0.16 0.16 4 5 6 14.05 15.87 17.94 2.54 2.78 2.06 2.33 0.48 0.45 0.16 0.155 0.13 0.13 0.13 0.09 2.25 1.83 0.42 0.16 0.13 0.16 8 22.30 3.23 2.23 1.00 7 20.27 9 24.53 2.94 3.04 2.03 2.45 1.01 0.49 0.12 0.15 0.145 0.10 0.06 -0.09 0.10 0.10 0.09 10 26.98 Assuming that competition drives down profitability (on existing assets as well as new investment) to 15.5% in year 6, 15% in year 7, 14.5% in year 8, and 12% in year 9 and all later years. What is the value of the concatenator business? Assume 13% cost of capital. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. 3.24 2.70 0.54 0.12 0.10 0.10

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Consider the table given below to answer the following question.
Year
Asset value
Earnings
Net investment
Free cash flow
Return on equity
Asset growth rate
Earnings growth rate
1
9.00
1.44
1.44
0.00
0.16
0.16
Present value
2
10.44
1.67
1.67
0.00
0.16
0.16
0.16
million
3
4
5
12.11 14.05 15.87
1.94
2.54
2.25
1.94
1.83
2.06
0.00
0.42
0.48
0.16
0.16
0.16
0.16
0.13
0.13
0.16
0.16
0.13
6
7
17.94 20.27
2.78
2.33
0.45
0.155
0.13
0.09
3.04
2.03
1.01
0.15
0.10
0.09
8
9
22.30 24.53
3.23
2.94
2.23
2.45
1.00
0.49
0.145
0.12
0.10
0.10
0.06 -0.09
Assuming that competition drives down profitability (on existing assets as well as new investment) to 15.5% in year 6, 15% in
year 7, 14.5% in year 8, and 12% in year 9 and all later years. What is the value of the concatenator business? Assume 13% cost
of capital.
Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.
10
26.98
3.24
2.70
0.54
0.12
0.10
0.10
Transcribed Image Text:Consider the table given below to answer the following question. Year Asset value Earnings Net investment Free cash flow Return on equity Asset growth rate Earnings growth rate 1 9.00 1.44 1.44 0.00 0.16 0.16 Present value 2 10.44 1.67 1.67 0.00 0.16 0.16 0.16 million 3 4 5 12.11 14.05 15.87 1.94 2.54 2.25 1.94 1.83 2.06 0.00 0.42 0.48 0.16 0.16 0.16 0.16 0.13 0.13 0.16 0.16 0.13 6 7 17.94 20.27 2.78 2.33 0.45 0.155 0.13 0.09 3.04 2.03 1.01 0.15 0.10 0.09 8 9 22.30 24.53 3.23 2.94 2.23 2.45 1.00 0.49 0.145 0.12 0.10 0.10 0.06 -0.09 Assuming that competition drives down profitability (on existing assets as well as new investment) to 15.5% in year 6, 15% in year 7, 14.5% in year 8, and 12% in year 9 and all later years. What is the value of the concatenator business? Assume 13% cost of capital. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. 10 26.98 3.24 2.70 0.54 0.12 0.10 0.10
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