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what is the total value

what is the total value

Essentials Of Investments
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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It's your first day on the job as a stock analyst and you are trying to assess the value of Beacon Industries. Your predecessor built a financial model that estimates cash flows for Beacon, but it only extends for 6 years. You know that in order to get the total value of the company, you need to add a so-called terminal value for all the cash flows in years 7 and beyond. This perpetuity will be based on the Year 6 cash flow, which is $19 million. You know that the discount rate that investors are using to assess Beacon is 9%, and you expect the cash flows to grow in perpetuity at 1.5% annually. If the PV of the 6-year cash flow model is $80 million, what is the total value of Beacon?
Transcribed Image Text:It's your first day on the job as a stock analyst and you are trying to assess the value of Beacon Industries. Your predecessor built a financial model that estimates cash flows for Beacon, but it only extends for 6 years. You know that in order to get the total value of the company, you need to add a so-called terminal value for all the cash flows in years 7 and beyond. This perpetuity will be based on the Year 6 cash flow, which is $19 million. You know that the discount rate that investors are using to assess Beacon is 9%, and you expect the cash flows to grow in perpetuity at 1.5% annually. If the PV of the 6-year cash flow model is $80 million, what is the total value of Beacon?
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