Question

26) Calculate the enterprise value of a firm with a market capitalization (market value of equity) of $80 Billion, market value of debt of $29 billion, and $4 billion in cash and equivalents. [ Note: Enter your answer in Billions; for example, if you calculate the enterprise value to be $100 Billion, then enter just 100 in the answer box.]

27) Calculate the NPV of an investment project that has an upfront cost of $1,000,000, but produces ongoing benefits of $185,000 each year forever, starting in one year. The firm’s cost of capital is 7%.

Answer 1

26.

Given Market Capitalization = $80 billion

Debt = $29 billion

Cash and Cash Equivalents = $4 billion

Hence, Enterprise Value = Market Capitalization + Total Debt - Cash and Cash equivalents

= 80 + 29 - 4 = $105 billion

27.

Let CF_n denote the cash flow in year n

Given :

CF0 = -1000000
CF1 = 185000
CF2 = 185000
.......

Cost of capital = r = 7%

NPV = CF0 + CF1/(1+r) + CF2/(1+r)² +....

= -1000000 + 185000/(1+0.07) + 185000/(1+0.07)² +........

= -1000000 + 185000/0.07

= $1642857.14

Hence, NPV of the project is $1642857.14