--%>
Assignment Help - homework help

Calculate present value of expected cash flow to shareholder

When valuing the shares of my company, I calculate the present value of the expected cash flows to shareholders moreover I add to the result obtained cash holdings and liquid investment. Is that correct?

E

Expert

Verified

The company is incorrect to add those, if it is not going to distribute the cash holdings in the near future. This is also incorrect to add the complete value of the cash holdings since the company requirements part of it to go on with its operations as the minimum cash holdings.

This could be correct to add all the cash holdings only in the following cases as follows:

a) When the interest rate received for the treasury to equal the interest rate paid for debt;

b) When the cash holdings were distributed instantly, and

c) When the cost of debt needed to compute the WACC was the weighted average of the cost of debt and the interest rate received for the treasury in this a case, the helpful debt in order to compute the ratio debt/shareholder’s equity has to be the debt minus the cash holdings.

The value of the excess cash holdings but over the essential amount in order to go on with the operations is lower than the book value when the interests received for the treasury are lower than interests paid for debt.

   Related Questions in Corporate Finance

  • Q : Define capital goods Capital goods :

    Capital goods: Goods employed in producing other goods are termed as capital goods.

    		•
  • Q : How can optimal capital structure be

    How can optimal capital structure be calculated?

    		•
  • Q : Data Case Please assist with the

    Please assist with the attached Data Case assignment

    		•
  • Q : Who described option pricing with

    Who described option pricing with deterministic volatility?

    		•
  • Q : What is the Free Cash Flow Is the Free

    Is the Free Cash Flow (FCF) the sum of the debt cash flow and the equity cash flow?

    		•
  • Q : Tax credit for lease payments problem

    ABC Inc. is planning to lease a computer for $3000 per annum, payable in advance, for a period of 4 years. The lease will cover maintenance costs. ABC CFO feels that if he buys the same computer he should be able to sell it at 15% of the purchase price after 4 years.

    		•
  • Q : Tax benefits of lease FedEx would like

    FedEx would like to acquire 300 vans for its business. It can buy each van for $35,000, depreciate it completely over 5 years, and then sell it for $10,000. The tax rate of FedEx is 30%, and its cost of debt is 10%. Avis Fleet Rental will lease these vans to FedEx for

    		•
  • Q : Problem on Stock per share value ABC

    ABC Company plans to buy back 1 million shares of its own stock from its cash reserves at $50 a share. This will raise the bankruptcy costs by $10 million, and the debt/assets ratio from 35% to 40%. The income tax rate of the company is 30%. Determine the value of the

    		•
  • Q : Calculate the risk-free rate You have

    You have been given the following information on two corporations; you are to assume that thesecurities are correctly priced. My Corp, Inc. has a Beta of 1.25 and an Expected Return of .145;Your Corp, Inc. has a Beta of .75 and an Expected Return of .095. Based on the

    		•
  • Q : State Transition Management Transition

    Transition Management: It is a financial service accessible to institutional investors who require making significant modifications to their portfolios, like merging, selling, or substantially restructuring them. This procedure can expose investors to

    		•