I need to solve for the asset value, but I'm not sure what rate needs to be used in order to solve for NPV, and then Asset Value. Formating & some information is in the picture attached below. Asset Beta= 1.096303 Discount Rate= 0.13372 Working capital to support sales is estimated to be 15.65% of yearly sales for the first 5 years and then is projected to slow to a 4.59% annual growth rate thereafter. The marginal corporate income tax rate is expected to average 23.67% barring any changes to the corporate tax code and the projected annual growth rate of Free Cash Flow (FCF) in the terminal phase is expected to grow approximately 1% more than the current risk-free rate of return indefinitely. Historically, the debt-equity ratio has averaged roughly 116% for which Ljutic A/I Inc.’s current debt level is $39,889,950 with an average maturity of 6 years and an interest rate on this debt averaging 8.175%. Upon a regression analysis, the historical equity Beta was calculated to be 2.067, while the risk-free rate of return is given as 2.876% and the market rate of return is assumed to be 12.45%. Currently there are 3,231,443 shares of common stock outstanding.
I need to solve for the asset value, but I'm not sure what rate needs to be used in order to solve for NPV, and then Asset Value. Formating & some information is in the picture attached below. Asset Beta= 1.096303 Discount Rate= 0.13372 Working capital to support sales is estimated to be 15.65% of yearly sales for the first 5 years and then is projected to slow to a 4.59% annual growth rate thereafter. The marginal corporate income tax rate is expected to average 23.67% barring any changes to the corporate tax code and the projected annual growth rate of Free Cash Flow (FCF) in the terminal phase is expected to grow approximately 1% more than the current risk-free rate of return indefinitely. Historically, the debt-equity ratio has averaged roughly 116% for which Ljutic A/I Inc.’s current debt level is $39,889,950 with an average maturity of 6 years and an interest rate on this debt averaging 8.175%. Upon a regression analysis, the historical equity Beta was calculated to be 2.067, while the risk-free rate of return is given as 2.876% and the market rate of return is assumed to be 12.45%. Currently there are 3,231,443 shares of common stock outstanding.
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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I need to solve for the asset value, but I'm not sure what rate needs to be used in order to solve for
Asset Beta= 1.096303
Discount Rate= 0.13372
Working capital to support sales is estimated to be 15.65% of yearly sales for the first 5 years and then is projected to slow to a 4.59% annual growth rate thereafter. The marginal corporate income tax rate is expected to average 23.67% barring any changes to the corporate tax code and the projected annual growth rate of
Historically, the debt-equity ratio has averaged roughly 116% for which Ljutic A/I Inc.’s current debt level is $39,889,950 with an average maturity of 6 years and an interest rate on this debt averaging 8.175%. Upon a regression analysis, the historical equity Beta was calculated to be 2.067, while the risk-free rate of return is given as 2.876% and the market rate of return is assumed to be 12.45%. Currently there are 3,231,443 shares of common stock outstanding.
Transcribed Image Text:### Understanding Asset Value Calculations
This educational guide will walk through an example of calculating asset value using future cash flows and their present value. Below is a table showcasing an example scenario:
#### Table Breakdown:
| Asset Value | Yr 0 | Yr 1 | Yr 2 | Yr 3 | Yr 4 | Yr 5 | T+1 |
|-------------|----------------------|---------------------|------------------|------------------|------------------|------------------|----------------|
| FCF | $(31,673,500.00) | $87,793,168.48 | $123,199,723.03 | $91,226,097.48 | $84,658,473.53 | $87,941,933.86 | $98,312,902.72 |
| PV FCF Yrs 0-5 | $(31,673,500.00) | $77,438,138.29 | $95,851,318.67 | $62,603,935.83 | $51,244,487.56 | $46,953,385.63 | |
| Sum of PV FCF Yrs 0-5 | | | | | | $302,417,765.98 | |
#### Explanation of Terms and Calculations:
1. **FCF (Free Cash Flow)**: These are the estimated cash flows the asset will generate in each year. The cash flows for each year are listed under respective columns from Yr 0 to Yr 5, with an additional column for T+1 (denoting a period beyond the initial five years).
2. **PV FCF (Present Value of Free Cash Flow)**: This cell provides the present value of the future cash flows from Yr 0 to Yr 5. The present value calculations incorporate a discount factor (not shown in the table) to adjust for the time value of money.
3. **Sum of PV FCF Yrs 0-5**: This row sums up the present value of the free cash flows from Yr 0 to Yr 5, providing a comprehensive total value.
#### Steps to Calculate Present Value (PV) of Free Cash Flows:
1. **Determine the Free Cash Flow (FCF)** for each period (Yr 0, Yr 1,
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