Chap06_DiscountedCashFlowExample.sheets
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Discounted Cash Flow Example - Pretzels Unlimited - Present Value
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YearCash FlowsPresent Value MultiplierPresent Value of Cash FlowComments $ 22.00 Current Market Price
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2018 $ 2.00 0.893 $ 1.786 $2.00 dividend12% Required Rate of Return
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2019 $ 2.20 0.797 $ 1.754 $2.20 dividend
We expect to receive the dividends
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2020 $ 2.30 0.712 $ 1.637 $2.30 dividend
as described and we expect the stock
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2021 $ 29.30 0.636 $ 18.621
$2.30 dividend + $27 proceeds from sale of stock
price to be $27 at the end of 2020.
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Total: $ 23.797
Present value of stock =SUM(discounted-cash-flows)
Yes, this is potentially a good investment
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for us. We calculate that the present
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Present Value Multiplier = 1 / (1+Rate)Time
value of the future cash flows from the
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dividends and the sale of the stock is
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Q) Why is the spreadsheet's final value differ by a few cents from our manual calculation?
approximately $23.80. However, the
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A) Because the spreadsheet's present value multipliers have more precision than our table.
market price is only $22.00. We can
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buy $23.80 of value for only $22.00.
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But always remember, we are simply
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identifying potential good investments.
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We must do much more research and
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exercise sound judgment when selecting
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a company to invest in.
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PresentValue
InternalRateOfReturn
 
 
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