Present Value Evaluation

In: Business and Management

Submitted By herr5071
Words 516
Pages 3
urned out to be -32%. As a result of the effective return being so low, I knew that the bid price would have to be lowered. In the graph below, I also illustrate a bid in the amount of $20 million that results in an effective return of 36%. Start Up Phase Growth Phase Terminal
DCF Method 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
WACC 0.20
Period PV (51.88) (226) 1,430
Total PV 78.61
60% Equity 47.16
NPV 27.16 Effective Return ($20) $27 36% → Vs. → ($40) $27 -32%

When calculating the effective return using the book value method I began with $3.5 (given) in 2004 and calculated each year forward. By 2014 the equity book value grew to $671.5. I took 60% of the present value of $671.5 and calculated the effective return using an initial investment of $40 million. Under these assumptions, I found that the effective return was 63%. This return immediately struck me as being high. Please refer to Exhibit 1 for these calculations. Similar results were found when calculating the effective return using the market value method. Using terminal earnings of $203 and a comparable P/E ratio of 15, I found Arcadian’s equity value to be $3039. I then took 60% of the present value of that amount and calculated the effective return using an initial investment of $40 million. Under these assumptions, the effective return was found to be 514%. This return was even more astronomical then that of the book value method. Due to the fact that the market value method is using a comparative P/E ratio when Arcadian currently has negative net incomes, I do not find the market value method to be a substantial indicator of the firm’s value.
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The growth rate applied to the steady state phase must be…...

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