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Chapter 6 – P6.1 – Assume an investment will generate cash flows at the end of Years 1 through 5 equal to $200, $240, $300, $420, and $480, respectively; from that point, the investment begins to generate a series of constant-growth perpetual cash flows.

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a. Calculate the present value of these cash flows at the end of Year 0, assuming a discount rate of 10% and a 3% constant growth rate for the perpetuity. Calculate the present value weighted average growth rate for this investment.

b. Calculate the present value of these cash flows at the end of Year 0, assuming a discount rate of 10% and a -3% constant growth rate for the perpetuity. Calculate the present value weighted average growth rate for this investment.

Chapter 6 – P6.7 Assume a company has expected free cash flows equal$12,000 in Year 0, before making any new investments. It has a discount rate of 15%, and the inflation rate is 3%. If the company does not invest any of its free cash flows without new investment in Year 0, its cash flows will grow at the inflation rate. The company believes it could invest 20% of its free cash flows before new investment perpetuity. Measure the value of the company under four scenarios: no new investment is made; the company makes a new investment each year and earns 10%, 15%, and 20% nominal return on its investment annually and in perpetuity. What if the company invested 40% of its free cash flows before new investment and earned a 10%, 15%, or 20% nominal return?

Chapter 8 – P8.4 – Assume Company A that operates in the retail industry and has an estimated beta of 1.6 is planning to merge with Company B that produces food related products and has an estimate beta of 0.8. At the time of the announcement of the merger, Company A was three times the size of Company B. Estimate the combined firm’s beta after the merger assuming that the merger is not expected to create or destroy value and that the pre-merger debt of the two companies will remain outstanding after the merger occurs.

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Chapter 11 – P11.2 – In Year 0, a company entered into a perpetual lease on certain property. The property has a value of $25,000, the cost of debt is 12%, and its annual lease payment is $3,000. The company expects all of the cash flows to grow at 3% in perpetuity and it expects to increase the amount of leased property at the same rate beginning at the end of Year 1 (all new leases are perpetual leases). The company has revenues of $5,000 in Year 1 and has no other expenses other than those related to the lease. The company’s tax rate on all income is 45%. All revenues and expenses are paid in cash. The company has no assets or liabilities other than those related to the lease. Assume today is the end of Year 0. The company has a 22% equity cost of capital, and the discount rate for interest tax shields is equal to the unlevered cost of capital. Value the company as of the end of Year 0 assuming the company treats the lease as an operating lease, and value the company again assuming the company treats the lease as a capital or finance lease, treating the present value of the lease payments as debt. As part of the valuation, prepare the company’s income statement and free cash flow schedule for Year 1 under each lease treatment. Use the weighted average cost of capital, equity DCF, and APV valuation methods to value the company.

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