1. Assume that a public corporation has 10,000,000 shares outstanding. First, you are to create the necessary Balance Sheets and Income Statements and then calculate the annual Cash Flow from Assets (aka: CFFA or Free Cash Flows (FCF)) for this corporation. A constraint here is that your CFFA must range between $40,000,000 and $45,000,000 annually. Second, after calculating CFFA, you are to assume that this corporation is a no-growth perpetuity and estimate its present value (aka: intrinsic value). Said another way, you are to replicate and explain the relevant parts of the textbook, notes, and lectures associated with CFFA and the intrinsic value of the firm.
Teach me the concepts.
2. In class, we 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):
(I)
(II)
Generally, with and . We know that (I) converges to (II) as n approaches. Create a numerical example to show that this is so and explain the relevance of this convergence with respect to the estimation of financial asset valuation.
Said another way, you are to replicate and explain the relevant parts of the textbook, notes, and lectures associated with the convergence of a perpetuity to the present value of an annuity.
Teach me the concept.