VALUING A CHAIN OF MCDONALD'S RESTAURANTS James and Mary Watson own a small chain of McDonald's restaurants that is valued at $2,300,000. They believe that the chain will grow in value at 12% per year compounded annually for the next 5 years. If they sell the chain, the funds will be invested at a rate of 6% compounded semiannually. They expect infla- tion to be 3% per year for the next 5 years. Ignore taxes, and answer the follow- ing, rounding answers to the nearest dollar at each step. McDonald's 1. Find the future value of the chain after 5 years. Then find the price they should sell the chain for if they wish to have the same future value at the end of 5 years. 1. 2. Find the future value of the chain if it grows at only 2% per year for 5 years. Then find the price they should ask for the chain given a 2% growth rate per year. 2. 3. Use the compound amount formula to answer the following: What would the future value of the chain be if it grew at the expected rate of inflation? Find the price they should ask for the chain if it grows at that rate. 3. 4. Complete the following table. Market Value Growth Rate Future Value Today 2% 3% (inflation) 12% The value of the chain varies by more than one million dollars, depending on the rate of growth assumed for the business for the next 5 years.
VALUING A CHAIN OF MCDONALD'S RESTAURANTS James and Mary Watson own a small chain of McDonald's restaurants that is valued at $2,300,000. They believe that the chain will grow in value at 12% per year compounded annually for the next 5 years. If they sell the chain, the funds will be invested at a rate of 6% compounded semiannually. They expect infla- tion to be 3% per year for the next 5 years. Ignore taxes, and answer the follow- ing, rounding answers to the nearest dollar at each step. McDonald's 1. Find the future value of the chain after 5 years. Then find the price they should sell the chain for if they wish to have the same future value at the end of 5 years. 1. 2. Find the future value of the chain if it grows at only 2% per year for 5 years. Then find the price they should ask for the chain given a 2% growth rate per year. 2. 3. Use the compound amount formula to answer the following: What would the future value of the chain be if it grew at the expected rate of inflation? Find the price they should ask for the chain if it grows at that rate. 3. 4. Complete the following table. Market Value Growth Rate Future Value Today 2% 3% (inflation) 12% The value of the chain varies by more than one million dollars, depending on the rate of growth assumed for the business for the next 5 years.
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
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Transcribed Image Text:Case Study //
VALUING A CHAIN OF MCDONALD'S
RESTAURANTS
James and Mary Watson own a small chain of McDonald's restaurants that is
valued at $2,300,000. They believe that the chain will grow in value at 12% per
year compounded annually for the next 5 years. If they sell the chain, the funds
will be invested at a rate of 6% compounded semiannually. They expect infla-
tion to be 3% per year for the next 5 years. Ignore taxes, and answer the follow-
ing, rounding answers to the nearest dollar at each step.
McDonald's
1. Find the future value of the chain after 5 years. Then find the price they should sell the
chain for if they wish to have the same future value at the end of 5 years.
1.
2.
2. Find the future value of the chain if it grows at only 2% per year for 5 years. Then find the
price they should ask for the chain given a 2% growth rate per year.
3. Use the compound amount formula to answer the following: What would the future value
of the chain be if it grew at the expected rate of inflation? Find the price they should ask
for the chain if it grows at that rate.
3.
4. Complete the following table.
Market Value
Growth Rate
Future Value
Today
2%
3% (inflation)
12%
The value of the chain varies by more than one million dollars, depending on the rate of
growth assumed for the business for the next 5 years.
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