Problem 6

Analysts often value companies by forecasting a series of cash flows and then estimating a horizon value. Suppose a firm forecasts a project's net cash flows ($millions) in years 1 through 4 as $120, $130, $135, and $137, respectively. If the project ends at the end of the fourth year, compute the following

1-The horizon value

2-The value of firm

Assume that the company had a historical growth rate of 3 percent and has a discount rate of 10 percent.

Problem 7

Consider the following 3 stocks:

Stock A: is expected to provide a dividend of 20$/share forever

Stock B: is expected to pay a dividend of 10$/share next year; thereafter, dividend growth rate will be 5% per year forever

Stock C: is expected to pay a dividend of 10$ next year; thereafter, the dividend growth rate is expected to be 20% a year for 4 years and zero thereafter.

If the market capitalization rate for each stock is 7%, which stock is the most valuable?