Project
Instructions: Read these instructions and each question carefully. Failure to follow these instructions will result in deductions from your grade. Additional instructions follow:
ALL WORK MUST BE ORIGINAL WORK, IN YOUR OWN WORDS. ALL CALCULATIONS, BALANCE SHEET AND STATEMENTS MUST BE CREATED USING YOUR OWN INFORMATION BASED ON WHAT IS PROVIDED
You are being asked throughout the project to replicate topics/materials. You MAY NOT use examples from class, the course textbook, other textbooks, the internet, or any other outside sources. This includes your own existing work product. Your old projects are considered your own existing work product. You must always create your own work product. You may never represent the work product of others as your work product. You must only produce current/original work product. Work product is defined as the answers that you provide to the hypothetical client. Violation of these instructions will result in a maximum score of 50% on the project. Said another way, rewrite everything, every time, in your own words.
If you believe a question is unanswerable, explain why and make any necessary assumption(s) and then answer the question. Make these assumptions at the beginning of your answer in Italic print (or otherwise highlighted) in order to stand out from the remainder of your answer.
If you believe a question has incorrect information, you are to make explicit reference to the incorrect information, provide corrected information, and answer the question. Make these corrections at the beginning of your answer in Italic print (or otherwise highlighted) in order to stand out from the remainder of your answer.
If you leave a question unanswered, partial credit cannot be granted. Therefore, make an attempt to answer all questions. Show your work for the maximum award of partial credit. In general, show your work. It helps the grader decipher your thought process.
Assume you are working with KHJ Consulting Inc., and the reader of your work product is a client of the firm. The reader is sound mathematically and has good comprehension and reasoning skills. You are to deliver a professional report, in terms of both quantitative and qualitative rigor, to the client summarizing the questions below.
If needed, attach a Reference section to the end of your project. You may follow any citation and referencing style that you desire; however, you must be consistent with its use.
You may not place jpeg files in your work product, i.e. no pictures/images. They are not readable by Turnitin.
Produce a professional work product (answers to the questions below) for the client.
Time Value of Money Template
INPUTS
N I/YR PV PMT FV
OUTPUTS
P/Y =
Project Questions
All questions are equally weighted
Our client ITech Geek has several questions for us to answer as their consultant firm concerning valuation, which cash flows matter, the calculation of these cash flows, convergence to a perpetuity, and bond pricing, among others. These are outlined below.
Question 1
ITech Geek is a publicly traded technology company and has 5,000,000 shares outstanding. Their marginal tax rate of 30%. Assume ITech Geek plows-back 60% of its net income into retained earnings.
First, you are to create the necessary Balance Sheets and Income Statement (create own numbers for these two off what is provided in the question) and then calculate the annual Cash Flow from Assets (aka: CFFA or Free Cash Flows (FCF)) for ITech Geek. A constraint here, however, is that your CFFA must range between $20,000,000 and $24,000,000 annually. Second, assuming ITech Geek’s annualized WACC is 8% and its annualized CFFA are growing at 5%, you are to estimate the current value of ITech Geek.
Question 2
ITech Geek is not familiar with the mechanics of corporate bond valuation. They are interested in the fact that bond prices converge to their PAR value as the date to maturity nears. Explain this concept to ITech Geek management. (PROVIDE AN ORIGINAL EXAMPLE TO ASSIST WITH EXPLANATION)
Question 3
We have often discussed the formulas for the present value of a perpetuity (aka: no-growth perpetuity) and the present value of an ordinary annuity (aka: finite series of cash flows):
PV=CF/r (I)
PV= ∑_(i=1)^n▒CF/〖(1+r)〗^i (II)
With CF>0 and 0<r<1. We know that PV= CF/r converges to PV= ∑_(i=1)^n▒CF/〖(1+r)〗^i as n approaches ∞. ITech Geek management is confused about this concept. Illustrate to ITech Geek management that this is so and why is it important in terms of valuation.
