09Class14

# 09Class14 - The present value of cash flows from the base...

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1 CF Year +T * (1+r) -T+1 /(r-g) The present value of cash flows from the base year +T onward

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2 1. Base year is the year +6. 2. Cash flow to common equity holders in year +6 is 5,240.3. 3. The growth rate of cash flow, g, is 0.03, 3 percent. 4. The appropriate discount rate, r, is 0.0775. Pepsi Example Exhibit 12.6
3 Total projection of PepsiCo’s common stock value. 1. The present value of years +1 through years +5 which equals \$16,761 plus 2. The present value from the base year +6 onward. which equals \$75,958. 3. Thus the total is \$ 92,719. Pepsi Example Exhibit 12.7

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4 a. Wedgewood Products will be acquired at the beginning of year 8 (end of year 7) using 40 percent debt and 60 percent stock. The interest rate is 10 percent and the cost of equity capital is 14 percent. The tax rate is 40 percent. What is the weighted average cost of capital for Wedgewood? Recommended Problem 12.14.a
5 b. The cash flow to debt and equity holders at the end of year +8, +9, +10, +11, and +12 is given. From year +12 onward cash flow grows at 8 percent per year. Calculate the present value of cash flows discounted to the beginning of year 8. Recommended Problem 12.14.b

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6 Free Cash Flow is best defined as Cash Flow From Operations plus Cash Flow From Investing. (Another possibility is Cash Flow from Operations minus Net
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## This note was uploaded on 04/21/2009 for the course MGMT 126 taught by Professor Miller during the Winter '09 term at UCLA.

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09Class14 - The present value of cash flows from the base...

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