How lower rates converge faster than higher rates

Assignment Help Finance Basics

Reference no: EM133715642

Question 1

Assume that our client, GeekTech Inc. is a publicly traded technology company. GeekTech Inc. faces a marginal tax rate of 40% and applies a plow-back of 50% of Net Income into Retained Earnings.

First, you are to create the necessary Balance Sheets and Income Statement and then calculate the annual Cash Flow from Assets (aka: CFFA or Free Cash Flows (FCF)) for GeekTech Inc. A constraint here, however, is that your last CFFA must range between $100,000,000 and $125,000,000 annually.

Second, after calculating GeekTech Inc.'s last CFFA, you are to assume that this corporation is a constant-growth perpetuity and estimate its present value (aka: intrinsic value, market value).

Assume the market determined risk adjusted required rate of return (aka: the appropriate discount rate, WACC) for GeekTech Inc. is 8.50% and the annual growth rate in GeekTech Inc's CFFA is 4.00%.

Question 2

GeekTech Inc. is confused about their understanding of the convergence of a finite series of cash flows (aka: annuity) to the value of a perpetuity (aka: no growth perpetuity). Specifically, they are confused about the fact that lower rates converge faster than higher rates.

First, provide an example of how lower rates converge faster than higher rates. Second, what are the implications from lower rates converging faster to the present value of a perpetuity than higher rates.

Reference no: EM133715642

Questions Cloud

What will be your percent return on capital : If the stock falls to $15/share what will be your percent return on capital? b. If the stock rises to $35/share, what will be your percent return on capital?

Write a short argument persuading the reader to watch movie : Choose your all-time favorite movie and write a short argument persuading the reader (your instructor) to watch the movie.

Analyze the advanced practice social work intern behaviors : Analyze the advanced practice social work intern behaviors. Specifically, how are they different from the generalist social work intern behaviors?

What are the potential risks arising out of this hazard : Your service has been suffering from a gastro-enteritis outbreak. What are the potential risks arising out of this hazard?

How lower rates converge faster than higher rates : How lower rates converge faster than higher rates. Second, what are the implications from lower rates converging faster to the present value of a perpetuity

What slides or information was unnecessary : What did I under-explain? What should I add? What slides or information helped you? What slides or information was unnecessary?

Explain the concept of reintegrative shaming : Explain the concept of "reintegrative shaming" and give a real-world example of how it has been used in practice.

Discuss why you would or would not invest in it : you could afford to buy a $200,000 house today with 80% loan from the any bank, explain and discuss why you would or would not invest in it?

Nutritional needs for normal growth-development of children : Discuss the basic nutritional needs for normal growth and development of children. What are physiologic changes in the aging adult that can affect nutritional s

User Account

All Pages