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RFG is considering a major expansion that will result in a more diversified business model.
At present, RFG's market capitalisation is $240 million. This is based on a beta of 1.6. The risk free rate is 4% and the market rate of return is 9%. RFG is financed entirely by equity. The company generates an annual cash surplus of $28.8 million.
The expansion will cost $50 million and will generate future cash flows of $12 million in perpetuity. This new business will reduce RFG's beta to 1.4.
Calculate the adjusted present value of the expansion.
Suggested Answer: A, B, D
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29 comments · newest first
EM
Emilio
11 months ago
Not sure about that, the expansion cost is pretty high.
TO
Tori
11 months ago
I'm leaning towards option B, $131 million sounds right!
CA
Catalina
12 months ago
Wait, $12 million in perpetuity? That seems optimistic.
BU
Buffy
12 months ago
I think the new beta of 1.4 is a good move!
LE
Leslie
1 year ago
The current market cap is $240 million.
ER
Ernestine
1 year ago
I think the new beta will definitely lower the discount rate, but I can't recall the exact steps to find the adjusted present value.
EZ
Ezekiel
1 year ago
I feel like I might be overthinking the cash surplus part. Should we factor that into the present value calculation or just focus on the expansion cash flows?
VA
Vashti
1 year ago
This question seems similar to one we did in class about adjusting for risk. I think I need to apply the CAPM formula here.
TY
Ty
1 year ago
I remember we practiced calculating the present value of cash flows, but I'm unsure about how to adjust for the new beta.
MI
Mitsue
1 year ago
Wait, I'm a little confused. Isn't a custodial arrest when you're actually arrested and taken into custody? I'm not sure the definition includes being read your rights. I'll have to double-check my notes on this.
MI
Mindy
1 year ago
If I recall correctly, the Foundation library is also open-source, so it could work for Lisa too. Not sure if it's the best choice though.
PA
Paulina
1 year ago
Hmm, I'm a bit confused by the wording here. I'll need to re-read the question a few times to make sure I understand what's being asked.
KI
Kimi
1 year ago
This seems pretty straightforward. I'm confident I can identify the correct style that will be used to render the code.
JE
Jessenia
1 year ago
Okay, let's do this step-by-step. I've got my calculator ready to crunch the numbers. This is going to be a breeze, I can feel it!
KE
Kenny
1 year ago
Finally, we subtract the present value of the cost from the present value of the cash flows to get the adjusted present value.
JO
Johna
1 year ago
Next, we need to calculate the present value of the cost of the expansion.
ER
Erick
1 year ago
Let's start by calculating the present value of the cash flows from the expansion.
CE
Cecily
2 years ago
Haha, I bet the person who wrote this question is laughing at us right now. 'Perpetuity' and 'adjusted present value' - they're really trying to trip us up!
ME
Merilyn
1 year ago
User 2
FE
Felice
1 year ago
User 1
MY
Myra
2 years ago
D) $59 million? Really? That's way too low. This question is testing our understanding of adjusted present value, not our ability to guess random numbers.
KI
Kimbery
2 years ago
I believe the adjusted present value of the expansion will be around $131 million, so I choose option B.
LA
Lanie
2 years ago
I agree, reducing the beta and generating future cash flows will increase the company's value.
DO
Dong
2 years ago
I'm pretty sure the answer is B) $131 million. The expansion will generate $12 million in perpetuity, and with a lower beta of 1.4, the present value should be higher than the initial $50 million investment.
FR
Freeman
1 year ago
That makes sense. So, the adjusted present value would be $131 million.
RO
Rosalia
1 year ago
The lower beta of 1.4 and perpetual cash flows of $12 million from the expansion should increase the present value.
RE
Ressie
1 year ago
But how did you come up with that calculation?
HE
Helene
1 year ago
I think the answer is B) $131 million.
KE
Kenny
2 years ago
I think the expansion will be beneficial for RFG.