4. The cash flows of a firm that has just conducted an Initial Public Offering (IPO) are...

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4.
The cash flows of a firm that has just conducted an InitialPublic Offering (IPO) are expected to be either £10 million perannum for 10 years and zero afterwards with probability‘p’ or £5 million forever with probability(1-p). The risk-adjusted discount rate for thisfirm is 10% per annum. I. Express the current fundamental value ofthe firm in terms of ‘p’. II. If the currentstock market value of the firm is £55 million, what is the value of‘p’ implied by the market?
(b) The cash flows of a firm are expected to be £1 million peryear starting next year for the first ten years and are thenexpected to start declining forever at the rate of 5% per year. Therisk-adjusted discount rate is 10% per annum. What is the presentvalue of the cash flows?
c) Investment analysts regularly prepare forecasts and reportsfor their clients on the valuation of the firms they follow asanalysts. Briefly discuss the factors that should be taken intoaccount in arriving at such valuations.

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a If the cash flow of the firm is10mn per year fornext 10 yearThe value of the firm Present value of all 10 years cash flow10 discount See Answer

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4.The cash flows of a firm that has just conducted an InitialPublic Offering (IPO) are expected to be either £10 million perannum for 10 years and zero afterwards with probability‘p’ or £5 million forever with probability(1-p). The risk-adjusted discount rate for thisfirm is 10% per annum. I. Express the current fundamental value ofthe firm in terms of ‘p’. II. If the currentstock market value of the firm is £55 million, what is the value of‘p’ implied by the market?(b) The cash flows of a firm are expected to be £1 million peryear starting next year for the first ten years and are thenexpected to start declining forever at the rate of 5% per year. Therisk-adjusted discount rate is 10% per annum. What is the presentvalue of the cash flows?c) Investment analysts regularly prepare forecasts and reportsfor their clients on the valuation of the firms they follow asanalysts. Briefly discuss the factors that should be taken intoaccount in arriving at such valuations.