Hi Ruheen,
This question is asking to use the DCF model to calculate the value of Bright Screen, given its annual cash flow and a specified terminal value. The WACC provided, at 10% would help determine a discount factor as well (unless you have a business calculator like BA2 plus, which you can plug into for I/Y).
In this case, the value for Bright Screens = PV of Annual Cash Flow Annuity for 4Years + PV of Terminal Value at 4th Year.
Annuity Factor at 10% for 4 Years = 3.170 and Annual Cash Flow = $110,000 (no tax implications). So the PV of Annuity = $348,700 = $110,000 * 3.170
PV of $1 at 10% in Year 4 = 0.683 and Terminal Value = $1,250,000 so PV of Terminal Value = $853,750 = $1,250,000 * 0.683
Total PV of Bright Screens = $1,202,450 so answer is B.
Hope that helped.
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Yash Kanabar
Analyst
Toronto ON
Canada
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Original Message:
Sent: 06-15-2023 12:56 AM
From: Ruheen Yadav
Subject: question solution urgent
hi i need detailed calculater working for the below question please
Clear Displays Inc. manufactures display screens for mobile devices and is looking to expand its business through acquisition. Clear Displays has a weighted average cost of capital of 10%. It is evaluating the opportunity to acquire one of its competitors, Bright Screens Inc. Cash flows for Bright Screens are forecasted to be $110,000 in each of the next four years, and net income for Bright Screens is forecasted to be $90,000 in each of the next four years. The projected terminal value for Bright Screens at the end of that four-year period is $1,250,000. Utilizing the discounted cash flow method, the valuation for Bright Screens is expected to be
answer is b
a)$1,139,050.
b)$1,202,450.
c)$1,535,300.
d)$1,598,700.
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Ruheen Yadav
Student
Dubai
United Arab Emirates
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