The following table shows the projected free cash flows of an acquisition target. The potential acquirer wants to estimate its maximu acquisition price at an 8 percent discount rate and a terminal value in year 5 based on the perpetual growth equation with a 4 perce perpetual growth rate. Year Free cash flow 1 2 3 4 5 -920 -460 0 272 844 a. Estimate the target's maximum acquisition price. Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Answer is complete and correct. Maximum acquisition price $ 14,452 b. Estimate the target's maximum acquisition price when the discount rate is 7 percent and the perpetual growth rate is 5 percent. Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. × Answer is complete but not entirely correct. Maximum acquisition price $ 39,037 ×

The following table shows the projected free cash flows of an acquisition target. The potential acquirer wants to estimate its maximu acquisition price at an 8 percent discount rate and a terminal value in year 5 based on the perpetual growth equation with a 4 perce perpetual growth rate. Year Free cash flow 1 2 3 4 5 -920 -460 0 272 844 a. Estimate the target's maximum acquisition price. Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Answer is complete and correct. Maximum acquisition price $ 14,452 b. Estimate the target's maximum acquisition price when the discount rate is 7 percent and the perpetual growth rate is 5 percent. Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. × Answer is complete but not entirely correct. Maximum acquisition price $ 39,037 ×

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

ChapterM: Time Value Of Money Module

Section: Chapter Questions

Problem 19P: Asset Purchase Price BWP Inc. is considering the purchase of an asset. BWPs required rate of return...

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The following table shows the projected free cash flows of an acquisition target. The potential acquirer wants to estimate its maximum acquisition price at an 8 percent discount rate and a terminal value in year 5 based on the perpetual growth equation with a 4 percent perpetual growth rate. Year 1 2 3 4 5 Free cash flow −830 −415 0 218 736 a. Estimate the target’s maximum acquisition price. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) b. Estimate the target’s maximum acquisition price when the discount rate is 7 percent and the perpetual growth rate is 5 percent. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
The following table shows the projected free cash flows of an acquisition target. The potential acquirer wants to estimate its maximum acquisition price at an 8 percent discount rate and a terminal value in year 5 based on the perpetual growth equation with a 4 percent perpetual growth rate. Year Free cash flow 1 2 -840 -420 Maximum acquisition price 3 a. Estimate the target's maximum acquisition price. (Do not round Intermediate calculations. Round your answer to the nearest whole dollar amount.) 4 5 224 748 Maximum acquisition price b. Estimate the target's maximum acquisition price when the discount rate is 7 percent and the perpetual growth rate is 5 percent. (Do not round Intermediate calculations. Round your answer to the nearest whole dollar amount.)
Refer to the investment opportunity for 2025 (purchase of new machinery) and calculate the following. Where discount factors are required use only the four decimals present value table (Appendix 1). Ignore taxes. 1. Payback Period (expressed in years, months and days). 2. Accounting rate of return on initial investment (expressed to two decimal places). 3. Net Present Value. Your answer must include the calculation of the present value(s) and NPV. 4. Internal Rate of Return (expressed to two decimal places). Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation. 5. Internal Rate of Return (expressed to two decimal places) if the machine is expected to have a salvage value of R200 000. Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation.
In using the two-step approach to Enterprise Valuation (EV), where EV = the Present Value of Planning Period Cash Flows (PVPPCF) + the Present Value of Terminal Value at the end of the Planning Period (PVTV), the PVTV calculation can be based on: a. Level annual cash flows discounted as a perpetuity. b. The Gordon Growth Model. c. An EBITDA multiple. d. All of the above. e. None of the above.
Vilas Company is considering a capital investment of $190,600 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $12,700 and $49,600, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment. Click here to view PV table. (a) Compute the cash payback period. (Round answer to 2 decimal places, e.g. 10.50.) Cash payback period 3.83 years Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 10.50.) Annual rate of return 6.66316894 %
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Windsor Enterprises is using a discounted cash flow model. Identify which model Windsor might use to estimate the discounted fair value under each scenario, and calculate the fair value using the present value tables: Scenario 1: Cash flows are fairly certain $260/year for 5 years Risk-adjusted discount rate is 6% Risk-free discount rate is 2% Scenario 1: (For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round final answers to 2 decimal places, e.g. 5,275.25.) Windsor might use Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1. Fair value Scenario 2: Windsor might use Fair value $ Scenario 2: Cash flows are uncertain $ 75% probability that cash flows will be $260 in 5 years 25% probability that cash flows will be $115 in 5 years Risk-adjusted discount rate is 6% 11 eTextbook and Media Risk-free discount rate is 2% Save for Later Last saved 1 second ago. model. model.…
This question will compare two different arbitrage situations. Recall that arbitrage should equalize rates of return. We want to explore what this implies about equalizing prices. In the first situation, two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A has a current price of $80 while asset B has a current price of $90.a. Which asset has the higher expected rate of return at current prices? Given their rates of return, which asset should investors be buying and which asset should they be selling?b. Assume that arbitrage continues until A and B have the same expected rate of return. When arbitrage ceases, will A and B have the same price?Next, consider another pair of assets, C and D. Asset C will make a single payment of $150 in one year while D will make a single payment of $200 in one year. Assume that the current price of C is $120 and that the current price of D is $180.c. Which asset has the higher expected rate of return at current…
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Net Present Value Method, Present Value Index, and Analysis for a service company Continental Railroad Company is evaluating three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows: Ramp Computer Facilities Network $423,052 Amount to be invested Annual net cash flows: Year 1 Year 2 Year 3 Year 1 2 3 4 5 6 7 8 9 10 6% Present Value of $1 at Compound Interest 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 Maintenance Equipment $677,579 0.424 0.386 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 305,000 284,000 259,000 0.361 0.322 15% 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 220,000 198,000 176,000 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 $188,789 125,000 86,000 63,000
Suppose you are offered a project with the following cash flows: Year Cash Flows 0 1 2 3 4 $8,800 -4,800 -3,500 -2,600 -1,400 a. What is the IRR of this offer? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR % O Accept O Reject ☆ b. If the appropriate discount rate is 13 percent, should you accept this offer? c. If the appropriate discount rate is 25 percent, should you accept this offer?
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