time value of money

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timer Asked: Sep 21st, 2017
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Question Description

For this milestone, submit a draft of the Time Value of Money section of the final project, along with your supporting explanations. Base your calculations on the data provided in this case study

https://www.sec.gov/Archives/edgar/data/354950/000...


Be sure to substantiate your claims.

Submit your calculations on the designated tab of the Final Project Student Workbook and your supporting explanations as a Microsoft Word document

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Modified Instructions for Milestone #1 Specifically the following critical elements must be addressed: I. Time Value of Money A. Calculate the following time value of money figures: 1.Calculate the present value of the company based on the given interest rate and expected revenues over time. Assume the cost of capital is 8% initially as noted in your workbook. NOTE: Assume each of the cash flows are end-of-year cash flows so you will be discounting each of the cash flows back to the year 2014. For example, this means the 2015 cash flow of $113m will be discounted one year, and so on for the remaining four years of cash flows. Similarly, assume the $880m cash flows for the years after 2019 occur on 2020, so this $880m cash flow needs to be discounted back to 2014 as well (financiers call this $880m cash flow the “horizon value” of the firm, something we will discuss later this term). The sum of the PV of these six cash flows will be your value of the firm in 2014. 2. Suppose the risk of the company changes based on an internal event. Recalculate the present value of the company. Here, assume the level of firm risk increases, so that the new cost of capital is 10%. 3. Suppose that a potential buyer has offered to buy this company in five years. Based on the present value you calculated above based on the higher level of risk (i.e., the 10% cost of capital), what would be a reasonable amount for which the company should be sold at that future time? Hint: Don’t lose sight of the fact that we are talking about the year 2019 after five (5) years has elapsed, and therefore the cash flows which remain at that point. B. What are the implications of the change in present value based on risk? In other words, what does the change mean to the company, and how would you, as a financial manager, interpret it? Be sure to justify your reasoning. C. Based on the future value of the company that you calculated, and being mindful of the need to effectively balance portfolio risk with return, what recommendation would you make about purchasing the company as an investment at that price? Be sure to substantiate your reasoning. Guidelines for Submission: Your paper must be submitted as a 2-to-3-page Microsoft Word document, not including your calculations, which should be completed in the Final Project Student Workbook. Use double spacing, 12-point Times New Roman font, and one-inch margins. Sources should be cited according to APA style. Milestone One: Time Value of Money (please fill in shaded YELLOW cells, row 6D - 6H) Interest Rate 8% FCF1 FCF2 FCF3 FCF4 FCF5 Amounts* Pv* 0.00 Total Pv* *In millions 0.00 Pv=FVN/(1+I)^N $0.00 PV(I,N,0,FV) $0.00 $0.00 $0.00 Explanations: FCF (Free Cash Flow) is the net change in cash generated by the operations of a business during a reporting period, minus cash outlays for working capital, capital expenditures, and dividends during the same period. FCF is a strong indicator of the ability of an entity to remain in business. Note: For this part of the Milestone, please use page 43 -capital lease payments under property. Interest Rate (given) - in our scenario we will use 8% interest rate. This rate is an implicit rate, the average rate that lease consumers face on the current market. Milestone Two: Stock Valuation and Bond Issuance (please fill in the shaded YELLOW cells) PART I: STOCK VALUATION Dividend from Financial Statements: Year Cash Div/share ($) Dividend Yield Stockholder's Stock Price Equity (in millions) 2012 2013 2014 #DIV/0! #DIV/0! #DIV/0! 1. Stock Valuation - The new dividend yield if the company increased its dividend per share by 1.75 Year Cash Dividend Div/Share ($) Yield +1.75 2012 1.75 #DIV/0! 2013 1.75 #DIV/0! 2014 1.75 #DIV/0! Stockholder's Stock Price Equity (in millions) 0 0 0 #DIV/0! #DIV/0! #DIV/0! 2. The dividend yield if the firm doubled it's outstanding shares Year Cash Div/Share ($) 2012 2013 2014 Dividend Yield 0 0 0 #DIV/0! #DIV/0! #DIV/0! Stockholder's Stock Price Equity (in millions) doubled 0 #DIV/0! 0 #DIV/0! 0 #DIV/0! 3. The rate of return on equity (i.e., the cost of stock) based on the new dividend yield you calculated above Year Cash Stock Price Div/Share ($) +1.75 2012 1.75 #DIV/0! 2013 1.75 #DIV/0! 2014 1.75 #DIV/0! PART II: BOND ISSUANCE Return on Investment #DIV/0! #DIV/0! Curent Bonds from Financial Statements Present Value Periods Interest Payments Future Value PV N I PMT FV ($2,963) 40 Semi-annual payment: 2036-2016 = 20 years *2 = 40 periods 2.9375 Interest paid semi-annually: 5.875%/2 = 2.9375% 0 This bond does not make regular PMT except for interest CALCULATING FV (please see help on the right hand side) 1. The new value of the bond if overall rates in the market increased by 5% Present Value Periods Interest Payments Future Value PV N I PMT FV ($2,963) 40 Please adjust interest 0 CALCULATING FV (please see help on the right hand side) 2. The new value of the bond if overall rates in the market decreased by 5% Present Value Periods Interest Payments Future Value PV N I PMT FV ($2,963) 40 Please adjust interest 0 CALCULATING FV (please see help on the right hand side) 3. The value of the bond if overall rates in the market stayed exactly the same - identical to CURRENT BOND VALUE from Financial Statements LOW cells) Explanations: Cash Dividend - distribution of the corporate income. They are not expen appear on Income Statement. Note: Part of Statement of Cash Flows. Please be aware that corporation Dividend Yield - annual cash dividend per share of common stock divided of a share of the common stock (Dividend yield = Annual Dividend/Curren Note: Current Stock Price is not part of the Financial Statements - calcula for Dividend Yield per share by 1.75 yield you calculated above Stockholder's Equity = Assets - Liabilities. Equity represents the ownersh Owners are called stockholders because they hold stocks or shares of the every corporate manager is to generate shareholder value. Return on Equity - for this part we will modify and use return on investm Using the formula: Dividend (+1.75)/+[(new price-old price)/old price] Note - for this part, you will need extra price from 2011 Bonds are a long-term debt for corporations. In buying a bond, the bondto the corporation. The borrower promises to pay specified interest rate lifetime and at the maturity, payback the entire principle. In case of bank have priority over stockholders for any payment distributions. Bonds = Debt...............Bondholders = Lenders Stock=Equity................Stockholders = Owners Calculation: Please note that for bond calculations, only one bond is used February 1, 2015 is the origination date. The value on financial statement PV (Present value). Maturity date is assumed for February 2036 and paym adjusted to February 1 and August 1. The following Senior-Note was used from page 44: Calculation: Please note that for bond calculations, only one bond is used February 1, 2015 is the origination date. The value on financial statement PV (Present value). Maturity date is assumed for February 2036 and paym adjusted to February 1 and August 1. 6-2016 = 20 years *2 = 40 periods : 5.875%/2 = 2.9375% egular PMT except for interest ee help on the right hand side) The following Senior-Note was used from page 44: 5.875% Senior Notes; due December 16, 2036; interest payable semi-ann December 16 PV (Present Value) = 2,963 million Our scenario: 5.875% Senior Notes; due February 1, 2036; interest payab February 1 and August 1 PV (Present Value) = 2,963 million 5.875%+5% = 10.875%/2 = 5.4375% ee help on the right hand side) 5.875%-5% = 0.875%/2 = 0.4375% ee help on the right hand side) FV (Future Value Calculation) - using Excel Formula Step 1) Select Formulas Step 2) Click on Financial Step 3) Select FV - you will see the formula below Step 4) Enter the following: Rate - enter as decimal, no % sign. Example: 4% as 0.04 Nper - number of period. Enter a whole number. Example 50 Pmt - payment. Our example does not assume regular payments disbursi Pv - Present value. Enter as negative. Example $1,000 should be -1000 Type - leave blank te income. They are not expenses and do not ase be aware that corporation list 5 years worth of hare of common stock divided by the market price ield = Annual Dividend/Current Stock Price). Financial Statements - calculated using the formula quity represents the ownership of a corporation. ey hold stocks or shares of the company. The goal of areholder value. dify and use return on investment instead. w price-old price)/old price] e from 2011 s. In buying a bond, the bond-owner lends money to pay specified interest rate during the loan's ntire principle. In case of bankruptcy, bondholders ment distributions. ers ers ulations, only one bond is used and we assume e value on financial statements will be considered ed for February 2036 and payment schedule page 44: ulations, only one bond is used and we assume e value on financial statements will be considered ed for February 2036 and payment schedule page 44: 36; interest payable semi-annually on June 16 and bruary 1, 2036; interest payable semi-annually on : 4% as 0.04 mber. Example 50 me regular payments disbursing principal ple $1,000 should be -1000 Milestone Three: Capital Budgeting Data (please fill in the shaded YELLOW cells) Initial Outlay Cash Flows (Sales) - Operating Costs (excluding Depreciation) - Depreciation Rate of 20% Operating Income (EBIT) - Income Tax (Rate 35%) After-Tax EBIT + Depreciation Cash Flows CF1 CF2 - $0 Select from drop downs below: NPV IRR $0.00 #NUM! WACC CF3 CF4 - CF5 - - Capital Budgeting Example Set-up Initial investment $65,000,000 Straight-line Depreciation of 20% Income Tax @35% WACC of 8% approximately. (HD WACC was abou Cash Flow (which in this case are Sales Revenues CF1: $50,000,000 CF2: $45,000,000 CF3: $65,500,000 CF4: $55,000,00 CF5: $25,000,000 Operating Costs CF1: $25,500,000 CF2: $25,500,000 CF3: $25,500,000 CF4: $25,500,000 CF5: $25,500,000 WACC- why do we use WACC rate for new proje doesn’t earn more percent than WACC, the corp abandon the project and invest money elsewher Initial Investment - always negative. Corporation money ("lose" it till they recover it via sales) in o benefit. ng Example Set-up nt $65,000,000 preciation of 20% ACCEPT REJECT proximately. (HD WACC was about 8.83%) h in this case are Sales Revenues) are as follows: we use WACC rate for new projects? If the project ore percent than WACC, the corporation should oject and invest money elsewhere. nt - always negative. Corporation has to invest t till they recover it via sales) in order to gain future Milestone Four: Interest Rate Implication (please fill in shaded YELLOW cells) 1. Original Scenario from Milestone 1 - Time Value of Money using 8% Interest Rate 8.00% FCF1 Amounts* FCF2 FCF3 FCF4 FCF5 113 111 108 101 97 Pv* (104.63) (95.16) (85.73) (74.24) (66.02) Total Pv* *In millions (425.78) 2. Change in interest rate and its implications - Lower Interest Rate (5%) Interest Rate FCF1 Amounts* FCF2 FCF3 FCF4 FCF5 113 111 108 101 97 Pv* (113.00) (111.00) (108.00) (101.00) (97.00) Total Pv* *In millions (530.00) 3. Change in interest rate and its implications - Higher Interest Rate (15%) Interest Rate FCF1 Amounts* FCF2 FCF3 FCF4 FCF5 113 111 108 101 97 Pv* (113.00) (111.00) (108.00) (101.00) (97.00) Total Pv* *In millions (530.00) Explanation: We will use Milestone 1 and Time Value of Money for Milesotne 4 analysis Two cases will be analyzed: Lower Interest Rate at 5% Higher Interest Rate at 15% SUMMARY TAB TAB 1 Note: This process could take up t 1. Time Value of Money FALSE TAB 2 FALSE FALSE FALSE PART I - Stock Valuation FALSE FALSE FALSE PART II - Bond Issuance Current Bond Value FALSE $9,433.58 New Value +5% FALSE FALSE 5.4375 $24,634.04 New Value - 5% FALSE FALSE 0.4375 $3,528.32 ote: This process could take up to 20 seconds TAB 3 Capital Budgeting FALSE FALSE FALSE TAB 4 Interest Rate Implication FALSE FALSE $9,785,570.71 50% ...
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Tutor Answer

psumanrec
School: Cornell University

Please find your final answer.

Interest
2015
113

10%
2016
111

2017
108

2018
101

2019
97

PV

$ -102.73

$ -91.74

$ -81.14

$ -68.98

$ -60.23

Total PV

$ -404.82

Amount(million)

Present Value
Period ,nper
Interest
PMT
Future Value

$ -404.82
5
0.1
0
$ 651.96


Running head: MILESTONE PROJECT

1

Milestone Project
Name
University Name
Course
Sept 22, 2017

MILESTONE PROJECT

2
Introduction

The time value of money is a concept that says that the money available at the present
time is worth more than the same amount in future due to potential earning capacity (Curwin,
2013). Thus, the time value of money serves as a connection between the value of money and
the time.The relationship between time and value of money holds importance in case of
capital structure decision, investment decision and capital budgeting.An investor can use the
concepts in making an investment decision and assessing the risk of the capital.In short, an
everyday decision based on saving, borrowing, and spending depends on the time value of
money as it affects our daily transactions.
The objective of the paper is to analyze the concept of time value of money for the
company Home Depot, Inc. The Home Depot is an American home improvement supplies
that sell tools, construction products and services.
Present Value of Company at 8% Cost of Capital
In order to calculate the present value of the firm in 2014, the expected revenue of the
firm is obtained from the year 2015 to 2018 from the annual financial report of Home Depot,
Inc. ("HD-2.1.2015-10-K", 2017).The cash flows from 2015 to 2018 obtained were $113
million,$111 million,$108 million,$101 million and $97 million respectively. The present
value for 2014 will be the sum of discounted value from the year 2015 to 2018 Using excel,
the present value of cash flow at the 8% cost of capital obtained was $425.78 million,
Present Value of Company at 10% Cost of Capital
When the risk of the changes from 8% to 10%, the present value of money decreased
from $425.78 million to $404.82(see Appendix).Thus, increasing the capital cost from 8% to
10% cause a decrease of $20.96 million in its present value.

MILESTONE PROJECT

3

Reasonable Amount Company should be sold
When the five-year has elapsed the company can be sold based on its future value five
years from now. The future value of the company being obtained in five years from now will
be $685.73 million. On the other hand, future value calculated at 8% cost of capital obtained
was $625.61 which is $60.12 million less compared to 10% cost of capital. Thus, the
reasonable amount that should be sold at 10% interest rate is $685.73 million.
Net present value and risk have a strong relationship with each other. In order to
arrive at the correct or approximate present value, it is appropriate to assess the ris...

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Anonymous
Thank you! Reasonably priced given the quality not just of the tutors but the moderators too. They were helpful and accommodating given my needs.

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