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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