Questions

Time Value of Money

Answer 1:

Shares Outstanding: 3,000,000

Marginal Tax Rate: 30%

ABC Public

Income Statement

For the Year Ended December 31, 2013

Sales:

 

Cash Sales

$303,210

Credit Sales

$151,605

Total Sales

$454,815

 

 

Less: Cost of Goods Sold

 

Materials

$7,500

 

Labor

$2,500

 

Overhead

$1,511

 

Other

$5,412

 

Total Cost of Goods Sold

$16,923

 

 

Gross Profit

$437,892

 

 

Less: Operating Expenses

 

Principal loan pmt

$12,000

 

Interest rate loan pmt

$300

 

Health Insurance

$800

 

Workman Comp Ins.

$6,600

 

Employee Salaries

$76,800

 

Labor Burden Costs

$13,824

 

Credit Card fees

$5,490

 

Equipment Depreciation

$9,176

 

Admin & Office Costs

$9,600

 

Auto Loans

$7,200

 

Interest Rate Truck Pmt

$216

 

Rent Expense

$9,600

 

Pmts to Suppliers

$9,600

 

Total Operating Expenses

$161,206

 

 

Net operating income

$276,686

Less: Other expenses

 

Interest expenses

$755

EBIT

$275,931

Income Tax

$82,779

Net income/ loss

 

$193,907

TABC Public

Balance Sheet

As on December 31, 2013

ASSETS

LIABILITIES AND EQUITY

Current Assets

Current Liabilities

 

Cash

$100,000

Accounts payable

$124,852

Accounts Receivable

$475,111

Other current Liabilities

$169,153

Inventory

$47,852

Total Current Liabilities

$294,005

Temporary investment

$257,745

 

 

Long-term debt

$127,000

Total Current Assets

$622,963

 

 

 

Total Liabilities

$421,005

Long-term investments

 

 

Land

$2,168,632

Owner's Equity

 

Building

$75,000

Paid-in capital

$75,444

(less accumulated depreciation)

$45,000

$2,198,632

Common Stock

$3,000,000

Plant and equipment

$879,845

Retained earnings

$136,850

(less accumulated depreciation)

$87,985

$791,861

Net income

$32,934

Furniture and fixtures

$55,555

Total Equity

$3,245,228

(less accumulated depreciation)

$2,778

$52,777

 

 

 

 

 

Total Assets

 

$3,666,233

Total Liabilities and Equity

$3,666,233

EBITDA: Net income + depredation + amortization

EBITDA

 

Net Income

$193,907

Add: Interest

$755

Depreciation

$9,176

Less: Change in working capital

($328,958)

Less: Capital Expenditure

0

FCF

 

$532,796

No-Growth Perpetuity

 

FCF/r

r

10%

 

 

 

No-Growth Perpetuity

FCF/r

No-Growth Perpetuity -FCF

 

$5,327,957

Business Equity Value (under FCFE model)

(FCFE Next Year)/(r - g)

g

5%

r

10%

 

 

Total Business Value

11,188,710

Answer 2

PV = CF/r - Equation 1

PV= CF/(1+r)^i - Equation 2

Equation 2 = Equation 1

PV= CF/(1+r)^i where CF = [(1-(1+r)^-n)/r]

PV = [(1-(1+r)^-n)/r] / r

PV/r x r = [1-(1+r)^-n]

PV = 1-0/(1+r)^n

R=1

CF = 1/(1+r)^n

PV = CF //(1+r)^n

Hence, proved.

Answer 3

When discount rates turn out to be negative will reduce overall investment i.e. it would have dramatically lower the hurdle. Investing a dollar today would be less than a dollar tomorrow. Such as we have cash flow of $100 with interest rate of -10% for five years, it will be as followed:

PV = Cf / (1 + r) ^n

=$ 100 / (1 + (-0.1)) ^ 5

=$ 100 / 0.9 ^ 5

= $ 169.3508781

Answer 4

Considering interest changes and bond prices, develop an example to explain how a bond selling at a ...