Question

Computing Present Value of Terminal Residual Operating Income

Use the following data to compute the present value of the terminal period ROPI for each of the four firms A through D. Assume a forecast horizon of four years.

	A	B	C	D
Terminal period ROPI	$208,011	$46,767	$93,674	$124,622
Weighted average cost of capital (WACC)	8.1%	11.9%	9.7%	13.9%
Terminal growth period rate	2.0%	1.0%	2.5%	2.0%

Do not round until your final answers. Round your answers to the nearest whole number.

			A	B	C	D
PV of terminal period ROPI			$Answer	$Answer	$Answer	$Answer

Answer 1

Value of Terminal period ROPI = Terminal period ROPI / (WACC - Growth rate)

PV of Terminal period ROPI = Value of Terminal period ROPI / (1 + r)ⁿ

So, PV of Terminal period ROPI = [ Terminal period ROPI / (WACC - Growth rate) ] / (1 + WACC)ⁿ

here 'n' is the no. of years.

Firm A

PV of Terminal period ROPI = [ $208,011 / (8.1% - 2.0%) ] / (1 + 8.1%)⁴ = $1,918,988.762 or $1,918,989

Firm B

PV of Terminal period ROPI = [ $46,767 / (11.9% - 1.0%) ] / (1 + 11.9%)⁴ = $253,184.4388 or $253,184

Firm C

PV of Terminal period ROPI = [ $93,674 / (9.7% - 2.5%) ] / (1 + 9.7%)⁴ = $683,937.167 or $683,937

Firm D

PV of Terminal period ROPI = [ $124,622 / (13.9% - 2.0%) ] / (1 + 13.9%)⁴ = $543,574.336 $543,574