Question

Assume that net income is the economic benefit in the valuation model. What is the present...

Assume that net income is the economic benefit in the valuation model. What is the present value of net income equal to $15,490,000 to be earned in 5 years? Assume the cost of equity is 12%, the cost of debt is 4% and WACC is 10%. Show the calculation.
Answers: a.

$12,731,650.88
b.

$10,379,721.39
c.

$8,789,442.00
d.

$9,618,071.29
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Homework Answers

Answer #1

Net income is the Profit After Taxes earned by the Company during the financial period. This profit has been calculated after payment of interest to debt holders, hence this portion of profit is attributable to the equity shareholders of the Company only (since this company doesn't have preference share capital)

As a result, to get the Present value of PAT (earned after 5 years) today, we shall discount the same using the cost of equity, and not the overall cost of capital of the Firm.

PV= $15490000 / ((1.12)^5)

= $ 8789442 (ans C)

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