2 Franchise Value a) Suppose that Mark Cuban wants to purchase the Mavericks in 2000 (call this...

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2 Franchise Value
a) Suppose that Mark Cuban wants to purchase the Mavericks in2000 (call this year 0), and he expects to receive $400,000 inprofits in years 1, 2, and 3 (each year). Now suppose that value ofthe Mavericks in year 3 is $500 million and that the interest rateis 4%. What is price that Mark would pay to make him break even in3 years (i.e. that makes E[B] – p =0)?
b) Now, suppose that Mark Cuban plans to purchase the Mavericksin 2000 for $285 million and he expects to receive $400,000 inprofits in years 1, 2, and 3 (each year). Now suppose that theinterest rate is 4%. What would be the value of the Mavericks in 3years that would make Mark break even?
c) Finally suppose Mark plans to purchase the Mavericks at $285million in 2000. The value of the mavericks will be $500 million in3 years and the interest rate is 4%. Suppose the expected profitsfor years 1, 2, and 3 is x (i.e. Mark expects to receive x in year1, x in year 2, and x in year 3). What is value of x that wouldmake Mark break even?

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4.1 Ratings (818 Votes)

2 a Profit each year 400000 Salvage value At t3 500000000 Interest rate 4 To break even the PV of cash outflow should be equal to PV of Cash inflow PV of Cash outflow Cost of Mavericks PV of Cash Inflow Year Cash flow PV Factor 4 PV of Cashflow 1 400000 096153846 38461538 2 400000 See Answer

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2 Franchise Valuea) Suppose that Mark Cuban wants to purchase the Mavericks in2000 (call this year 0), and he expects to receive $400,000 inprofits in years 1, 2, and 3 (each year). Now suppose that value ofthe Mavericks in year 3 is $500 million and that the interest rateis 4%. What is price that Mark would pay to make him break even in3 years (i.e. that makes E[B] – p =0)?b) Now, suppose that Mark Cuban plans to purchase the Mavericksin 2000 for $285 million and he expects to receive $400,000 inprofits in years 1, 2, and 3 (each year). Now suppose that theinterest rate is 4%. What would be the value of the Mavericks in 3years that would make Mark break even?c) Finally suppose Mark plans to purchase the Mavericks at $285million in 2000. The value of the mavericks will be $500 million in3 years and the interest rate is 4%. Suppose the expected profitsfor years 1, 2, and 3 is x (i.e. Mark expects to receive x in year1, x in year 2, and x in year 3). What is value of x that wouldmake Mark break even?