ECN 5600_Chapter06 - The numerator of the NPV is the cash...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
The numerator of the NPV is the cash flows--these can be either riskless or risky. The denominator of the NPV is the discount rate. The more risky the numerator, the higher the discount rate. ( 29 ( 29 ( 29 1 2 3 2 3 ... 1 1 1 Cash flow Cash flow Cash flow NPV Cost today discount rate discount rate discount rate = + + + + + +
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
BANK CD Savings account interest rate 4.00% CD rate 5.00% Year 0 -10,000.00 1 500.00 2 10,500.00 NPV 188.61 #NAME? CD cash flows A B C 1 2 3 4 5 6 7 8 9 10
Background image of page 2
Year 0 -1,000 1 1,500 Discount rate 4% NPV 442 #NAME? IRR 50% #NAME? EVELYN WYER LIPSTICK FRANCHISE Franchise cash flows A B C 1 2 3 4 5 6 7 8
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
LEASE VERSUS PURCHASE WITH TAXES Asset cost 4,000.00 Annual lease payment 1,500.00 Bank rate 15% After-tax bank rate 9% #NAME? Tax rate 40% Year 0 -4,000.00 -900.00 #NAME? 3,100.00 #NAME? 1 533.33 #NAME? -900.00 -1,433.33 2 533.33 -900.00 -1,433.33 3 533.33 -900.00 -1,433.33 NPV -2,649.98 -3,178.17 #NAME? 18.33% #NAME? What if you borrowed $3,100 from the bank? Year 0 3,100.00 3,100.00 1 -1,433.33 -1,224.67 #NAME? 2 -1,433.33 -1,224.67 3 -1,433.33 -1,224.67 IRR 18.33% 9.00% #NAME? Purchase cash flows Lease cash flows The differential cash flows: Lease minus purchase Explanation: The lease is like a loan--an inflow of $3,100.00 in year 0, and an after-tax outflow of $1,433.33 in year 1, $1,433.33 in year 2, and $1,433.33 in year 3. The IRR of these cash flows is 18.33%. Thus the lease is more expensive than borrowing the money from the bank, since the after-tax cost of a bank loan is 9.00%. After-tax money saved by leasing Same amount from bank This is the depreciation tax shield if you buy the computer. A B C D E F G 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Background image of page 4
UNITED TRANSPORT--WACC Number of shares 3,000,000 Market price per share 10 E, market value of equity 30,000,000 #NAME? D, market value of debt 10,000,000 20% 8% 40% 16.20% #NAME? r E , cost of equity r D , cost of debt T C , firm's tax rate WACC, weighted average cost of capital: WACC=r E *E/(E+D)+r D *(1-T C )*D/(E+D) A B C 1 2 3 4 5 6 7 8 9 10 11 12
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
VALUING XYZ CORP. SHARES 10 Dividend growth rate, g 7% 15% Share value 133.75 #NAME? Current dividend, D 0 Cost of equity, r E The formula used in cell B5 is usually called the Gordon dividend model , in honor of M. J. Gordon,who first stated its application to share valuation (1959). A B C 1 2 3 4 5 6 7
Background image of page 6
3.00 25.00 Anticipated dividend growth rate, g 8% 20.96% #NAME? USING THE GORDON MODEL TO COMPUTE THE COST OF EQUITY r E Current dividend, Div 0 Current share price, P 0 Gordon model cost of equity, r E A B C 1 2 3 4 5
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
3.00 25.00 Anticipated dividend growth rate, g 5% 17.60% #NAME? USING THE GORDON MODEL TO COMPUTE THE COST OF EQUITY r E Current dividend, Div 0 Current share price, P 0 Gordon model cost of equity, r E A B C 1 2 3 4 5
Background image of page 8
1998 0.2533 1999 0.2667 2000 0.3200 2001 0.3700 2002 0.4000 12.10% #NAME? 0.40
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/15/2012 for the course ECON 5600 taught by Professor Will during the Spring '11 term at Utah Valley University.

Page1 / 21

ECN 5600_Chapter06 - The numerator of the NPV is the cash...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online