... Eastern Europe, and Middle East. The information the company provided was strictly based on a predicted study of future outcomes based on emerging markets. The paper of itself does not issue a company strategy on how to use the information found. In this paper I will use scenarios the company presents and determine how Goldman Sachs should invest 5 million dollars recently received to maximize its wealth. In the overview Goldman Sachs mentioned: That they developed a model of discount rate determination that permits the company to recreate discount rate history and calculate discount rates for 23 emerging markets over the last 25 years. The comparison of current discount rates versus their long-term trend has powerful investment implications and turns the investment decision on its head. Abnormally high discount rates relative to history (normally interpreted as punishing cash flows) may be a buy signal, while abnormally low rates may be a sell signal. Current emerging market discount rates are approximately in line with their five-year moving average. From purely a risk perspective, Asian markets appear undervalued, while Latin America and EMEA seem to be slightly overvalued (Mariscal and Hargis, p. 1). Emerging markets is a big deal when it comes to investments and to ensure great success it is best to purchase shares from companies that best fits the investigating company’s strength and exploits attractive opportunities. Before investing Goldman Sachs will analyze...
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...Cost-Benefit Assessment Too asses and give recommendation on whether or not to rebuild the city of new Orleans I will be examining the cost to benefits of such a rebuild and the impact and benefits it will have towards the city. In the CBA, I will be examining the cost of rebuilding New Orleans to pre Katrina conditions without making any additional upgrades to the levees and infrastructure. This will give me a more accurate cost model to base my recommendation on. As for the benefits I will examine the benefits of recovered losses when comparing pre Katrina data to post Katrina dat. The areas where I will be examining are tourism recovered, port operations recovered, wages recovered, spending recovered, and taxes recovered. The future value (FV) of these benefits will then be discounted to present value (PV) and compared to the cost of rebuilding to represent the net present value (NPV) of the expected amount to be gained or lost by carrying out the recovery. If the NPV is less than the cost, then rebuilding New Orleans will yield a loss and my recommendation will not favor a recovery. If the inverse is true, and the proposal will be in favor of the recovery. All calculations will based on post Katrina 2006 reports and data to give a more realistic prediction of the decision that could have been concluded given data directly after the catastrophe. Costs of Rebuilding These cost are compiled from the Department of Homeland Securities assessment of the city, found in...
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...Discount Factor Table DISCOUNT FACTOR (p.a.) FOR A RANGE OF DISCOUNT RATES Present Value of $1 in the Future at Discount Rate r% Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 3% 1 0.9709 0.9426 0.9151 0.8885 0.8626 0.8375 0.8131 0.7894 0.7664 0.7441 0.7224 0.7014 0.6810 0.6611 0.6419 0.6232 0.6050 0.5874 0.5703 0.5537 0.5375 0.5219 0.5067 0.4919 0.4776 0.4637 0.4502 0.4371 0.4243 0.4120 0.4000 0.3883 0.3770 0.3660 0.3554 0.3450 0.3350 0.3252 0.3158 0.3066 4% 1 0.9615 0.9246 0.8890 0.8548 0.8219 0.7903 0.7599 0.7307 0.7026 0.6756 0.6496 0.6246 0.6006 0.5775 0.5553 0.5339 0.5134 0.4936 0.4746 0.4564 0.4388 0.4220 0.4057 0.3901 0.3751 0.3607 0.3468 0.3335 0.3207 0.3083 0.2965 0.2851 0.2741 0.2636 0.2534 0.2437 0.2343 0.2253 0.2166 0.2083 5% 1 0.9524 0.9070 0.8638 0.8227 0.7835 0.7462 0.7107 0.6768 0.6446 0.6139 0.5847 0.5568 0.5303 0.5051 0.4810 0.4581 0.4363 0.4155 0.3957 0.3769 0.3589 0.3418 0.3256 0.3101 0.2953 0.2812 0.2678 0.2551 0.2429 0.2314 0.2204 0.2099 0.1999 0.1904 0.1813 0.1727 0.1644 0.1566 0.1491 0.1420 6% 1 0.9434 0.8900 0.8396 0.7921 0.7473 0.7050 0.6651 0.6274 0.5919 0.5584 0.5268 0.4970 0.4688 0.4423 0.4173 0.3936 0.3714 0.3503 0.3305 0.3118 0.2942 0.2775 0.2618 0.2470 0.2330 0.2198 0.2074 0.1956 0.1846 0.1741 0.1643 0.1550 0.1462 0.1379 0.1301 0.1227 0.1158 0.1092 0.1031 0.0972 7% 1 0.9346 0.8734 0.8163 0.7629 0.7130 0.6663 0.6227 0.5820 0.5439 0.5083 0.4751 0.4440 0.4150 0.3878 0.3624 0...
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...for a total of 15 cartons for $85, how many cartons of each were bought? Let Erasers be represented by “e” and pencils by “p” So, according to given condition, Total number of cartons of pencils and erasers are e + p = 15 ------- (I) Similarly, for the cost function, 5e + 7p = 85 ----------- (II) Solving simultaneously, we get e = 10 & p = 5 So, cartons of erasers = 10 Cartons of pencils = 5 3. The price of a hamburger increased from $1.10 to $1.59. What percent did the price increase? % age change = (1.59-1.10)/1.10 % = 44.55% 4. Morgan Company received from Lee Company an invoice dated September 27. Terms were 2/10 EOM. List price on the invoice was $5,000 (freight not included). Morgan receives a 9/7 chain discount. Freight charges are Morgan’s...
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...Capital Budgeting Assignment 2 Ebony N. Robinson FIN 534: Financial Management January 30, 2011 Professor: Dr. Glenn L. Stevens Strayer University Abstract The Net Present Value rule states that when making an investment decision, choose the project with the highest NPV. If the objective is to maximize wealth, then “the NPV rule always gives the correct answer (Berk and DeMarzo, 2011).” According to the text, we use the NPV rule to evaluate capital budgeting decisions, making decisions that maximize NPV (Berk and DeMarzo, 2011). Determining which projects to accept or reject is based on whether or not the project has a positive NPV. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. Based upon the principle of this rule, a project with a positive NPV is accepted because it ensures that the future value of that same dollar will be greater. The following scenario is provided to evaluate Bauer Industries’ project to manufacture lightweight trucks. Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental free cash flow projections (in millions of dollars): | ...
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...Collinsville case study 1. Which firms are the “identical twins” of the Collinsville investment? Using the β’s for those assets and the methodology learned in this course, determines the appropriate discount rate for the Collinsville investment. We are interested in obtaining the asset beta for Collinsville investment. Here from the reading material, we find there were altogether 6 chemical companies that produce sodium chlorates. They are Hooker, Pennwalt, American, Kerr-McGee, Brunswick and Southern. However, since we are evaluating the addition of a sodium chlorate plant, the two firms (Brunswick and Southern) who specialize in producing sodium chlorate are likely the best “twins”. To determine the asset betas of each company, we need to debt and equity. Here we just use the average number (from year 1977-1978) of debt and equity of each company to calculate it. Since the beta for debt is 0, by plugging these into the unlevering beta calculation of E/(D+E) * βE giving the asset beta column in Table 1. Taking simple average of asset betas giving the number of 0.91. Then we just need to calculate the proper discount rate using CAPM model. Given the risk premium of 6% and risk free rate of 8.5% (9.5%-1%), we get the discount rate (Opportunity cost of capital of the project) which is 14.87%. 2. Calculate the net present value of the Collinsville plant without the laminate technology. Remember that the transaction takes place at the end of 1979. To calculate the...
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...0% 3,000 Year 3 10.0% 3,240 a Referral Rate b Referred Customers c Retention 75.0% 80.0% 85.0% Rate d Retained 37,500 32,400 Customers e Total 50,000 40,500 35,640 Customers g Revenue per $389.76 $429.76 $429.76 Customer h Total Revenue $19,488,000 $17,405,280 $15,316,646 I Direct Costs $256 j MaSS mARKETING Cost $80 k Marketing Costs $25 l Total Costs $12,800,000 $10,368,000 $9,123,840 $4,000,000 0 0 $1,250,000 $1,012,500 $891,000 $18,050,000 $11,380,500 $10,014,840 m Profit n Discount Rate o Net Present Value p Cumulative NPV q Lifetime Value $1,438,000 $6,024,780 $5,301,806 1.00 1.14 1.30 $1,438,000 $5,284,895 $4,078,313 $1,438,000 $6,722,895 $10,801,207 $28.76 $134.46 $216.02 Lifetime value calculations are more complex than simple profitability. For this reason, let's look at this chart line by line. For convenience, we will refer to each line by its letter (a) as we go. We will begin with 50,000 customers (e) who were acquired at an average cost of $80 each (j), or $4 million. These customers are not static. They tend to drift away. A year later, only 75% of them are still using their card. Their retention rate is 75% (c). Of those who remain, the retention rate increases to 80% in Year 2 and 85% in Year 3. Some of these customers are encouraged by marketing efforts of $25 per customer per year (k) to become advocates and get their relatives and friends to take out the card. This results in a referral rate (a) and three thousand referred customers in...
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...formal education and family wealth) has a positive influence in the final financial balance in the shown proportions. Case: A customer is 32 years old, is a college graduate (so that year’s education=16) and has a household wealth of $150000: Balance = -17,732 + 367 (32) + 1,300 (16) + 0.116 (150,000) = $32,212 Part II: Complete Chapter 2 Problems and Exercises #6, p. 51. Question Part II: Complete Chapter 2 Question 6. A pharmaceutical manufacturer has projected net profits for a new drug that is being released to the market over the next five years: Year Net Profit 1 $(675,000,000) 2 $(445,000,000) 3 $(175,000,000 4 $125,000,000 5 $530,000,000 Use a spreadsheet to find the net present value of these cash flows for a discount rate of 3%. Please see excel attachment for the solve...
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...present period?” INTRAGENERATIONAL DISCOUNTING * Consumption rate of interest cum shadow price of capital method (CRI-SPC Method) * The level of public investment should be based on individual preference for present consumption vs. future consumption * The marginal rate of time preference * Investment is simply a means of using resources that are potentially available for consumption now in order to increase consumption later * Individuals typically have a positive rate of time preference * They demand compensation when forgoing present for future consumption * SDR = rate of time preference * If the future increase in net benefits > present costs (via consumption rate of interest, CRI) = project passes a potential compensation test * Possible for the winners to compensate the losers * Still have sufficient gains to allow for pareto efficiency * Ex. Net return available to individual savers is 2% per year Project cost (to taxpayers) = $1M this year Net benefit = $3.2M in 50 years * forgoing current consumption of $1M and lending at 2%, return = $2.72M in 50 yrs * therefore, the $3.2M benefit will be preferred * If we ignore intragenerational redistributions, we can suggest that this project would improve social welfare * If individuals seek to maximize their own well-being (economic theory), then marginal rate of time preference = rate at which they can trade present for future consumption (or vice versa) ...
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...and well- known Compustat® database. These problems provide an easy, online way for students to incorporate current, real-world data into their learning. See examples in Chapter 3, page 92; Chapter 4, page 125. xv Basic (continued ) Intermediate (Questions 19–20) Challenge (Questions 21–23) c. If you apply the NPV criterion, which investment will you choose? Why? d. If you apply the IRR criterion, which investment will you choose? Why? e. If you apply the profitability index criterion, which investment will you choose? Why? f. Based on your answers in (a) through (e), which project will you finally choose? Why? 18. NPV and Discount Rates An investment has an installed cost of $412,670. The cash flows over the four-year life of the investment are projected to be $212,817, $153,408, $102,389, and $72,308. If the discount rate is...
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...Part I: This part of the assignments tests your ability to calculate present value. A. Suppose your bank account will be worth $15,000.00 in one year. The interest rate (discount rate) that the bank pays is 7%. What is the present value of your bank account today? What would the present value of the account be if the discount rate is only 4%? The present value for a bank account that is worth $15, 000 in one year at an interest rate of 7% will be $14019.00. Using the Present Value Factors Table for a period of one year at a 7% rate value factor is .9346. $15, 000 x .9346= $14019.00 worth in value. The present value for a bank account that is worth $15, 000 in one year at an interest rate of 4% will be $14422.50. Using the Present Value Factors Table for a period of one year at a 4% rate value factor is .9615. $15, 000 x .9615= $14422.50 B. Suppose you have two bank accounts, one called Account A and another Account B. Account A will be worth $6,500.00 in one year. Account B will be worth $12,600.00 in two years. Both accounts earn 6% interest. What is the present value of each of these accounts? Account A would be worth $6, 132.10. Account A in one year at a 6% interest rate value factor is .9434. $6500 x .9434= $6132.10 Account B would be worth $11, 214.00. Account B in two years at a 6% interest rate value is .8900. $12, 600 x .8900= $11. 214.00 C. Suppose you just inherited a gold mine. This gold mine is believed to have three years worth of gold deposit. Here...
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...million at the current time. To start they allocated 5 million shares to themselves. Along with the 5 million shares they decided to put aside 1.5 million shares for any potential future employees. The group also decided that after 2 additional years they would need to raise another $2 million. Venture Vultures offered to invest $4 million at $1 a share. They did not fully believe this was the best valuation however. Because of this they wanted to create a model that would show an appropriate valuation. The group of MBA students believed SpiffyTerm, Inc. was capable of releasing an IPO after 4 years of approximately $80 million. They did take into consideration the potential risks of their venture. Because of this they came up with a discount rate of 45%. To start, defining what a term sheet is and its role in this circumstance. A term sheet is a bullet-point document that outlines the material terms and conditions of a business agreement. A term sheet can be either binding or non-binding. Within the context of venture capital financing the term sheet usually includes conditions for financing a startup company. Crucial offering terms tend to include the amount raised, price per share, pre-money valuation, liquidation preference, voting rights, anti-dilution provisions, and registration rights. The term...
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...Financial Management Fair Value Valuation Relevant Formulae… Faizan Ahmed 2 SZABIST Financial Management Question # 1 Construction of Yield Curve… • Given the PKRV rates available under the sheet named RELEVANT DATA in the excel workbook provided FOOD FOR THOUGHT – SET 1, you’re required to do the following: – Construct a short-term yield curve and comment on its shape; – Construct a long-term yield curve and comment on its shape. Faizan Ahmed 3 SZABIST Financial Management Question # 2 Valuation of Government Securities… • Consider its January 03, 2011, you’re required to calculate the fair values of the following government securities: Treasury Bills Days to Maturity PIBs Initial Maturity Years to Maturity T-Bill – A 9 PIB – A 30 Years 3 Years T-Bill – B 117 PIB – B 7 Years 5 Years T-Bill – C 360 PIB – C 15 Years 11 Years • Suppose State Bank of Pakistan (SBP) in its monetary policy announce a hike of 50 basis points in the discount rate. Please revisit your fair value calculations after accommodating the increase in your discount rates (Assume that the surge in discount rate affects every tenor equally). *Look up the sheet named RELEVANT DATA within the excel file for appropriate discount rates. Faizan Ahmed 4 SZABIST Financial Management Question # 3 Valuation of Corporate Bonds… • Consider its March 10, 2006, Searle Pakistan in an attempt to swap its costly ...
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...gasoline dealers on an improved road is a benefit of the road project. F 4. If increases in agricultural land values are viewed as a benefit of an irrigation project, then the market value of projected increased crops should also be included as a benefit of the project. 5. The social rate of discount must equal the opportunity cost of funds used to finance a project. F 6. If a project has a B/C ratio of 0.9, its approval will result in net benefits to citizens of the nation. F 7. The benefits of widening a road consist only of the cost savings to existing users of the road. 8. If the benefits of a new bridge exceed the costs, then there will be a net social gain from building the bridge. F 9. If the marginal social cost of a new road exceeds its marginal social benefit, then building the road will result in a net social gain. F 10. The higher the social rate of discount, the more government projects for which benefits will exceed costs. T 11. A lower discount rate favors more capital-intensive investments that yield net benefits further into the future. 12. The present value of a stream of net benefits for 20 years will be less than the sum of those benefits unless the social rate of discount is zero. F 13. Building a new sports stadium results in food sales at the facility. These food sales should be con¬sidered a benefit of the new stadium. 14. Program budgeting seeks to group agencies with similar purposes for budgeting, independent of the government department to which...
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...If Venerus implements the suggested methodology, what would be the range of discount rates that AES would use around the world? Does this make sense as a way to do capital budgeting? Venerus framework consisted of fairly simple set of rules in which a 12% discount rate was used for all the projects and he felt that this model worked fairly well in a world of domestic contract-generation projects. After AES’s international business expansion the model become increasingly strained with the expansions in Brazil and Argentina because hedging key exposures such as regulatory or currency risk was not feasible. Based on the facts of 15 sample projects in different countries in the world, in order to calculate the range of discount rates around the world, we should find the highest and lowest WACC in 15 samples, which should be the WACC of USA and WACC of Argentina, because USA has the highest credit rating and Argentina has the lowest credit rating in 15 sample projects. First, we identified unlevered beta for USA and Argentina from Exhibit 7b are 0.25 for USA because its contract generation project and 0.5 for Argentina because of competitive supply project. We found the Debit to Capital Ratio for USA and Argentina in Exhibit 7a are 39.5% and 40.8% respectively. By substituting those values we calculated leverages bête for USA and Argentina. Second, we calculated Cost of Equity by using Risk Free (10 years US Treasury bond), Risk Premium (US Risk premium) and Leveraged beta. ...
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