Question

Linda Clark received $225,000 from her mothers estate. She placed the funds into the hands of a broker, who purchased the fo$79,620 3 years $225,000 = 11.80 % Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount

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Answer #1

1a.

Equity
Year Cashflow PV factor 11% Discounted cashflow
0 -96000 1.0000 -96000
3 165000 0.731191 120646.6
NPV 24646.58
Preference
Year Cashflow PV 11% Discounted cashflow
0 -51000 1.00000 -51000.00
1 2040 0.900901 1837.84
2 2040 0.811622 1655.71
3 2040 0.731191 1491.63
3 37000 0.731191 27054.08
NPV -18960.74
Bonds
Year cashflow PV 11% discounted cashflow
0 -78000 1.00000 -78000.00
1 4500 0.900901 4054.05
2 4500 0.811622 3652.30
3 4500 0.731191 3290.36
3 83000 0.731191 60688.88
-6314.40

1b- From the above, its clear that Linda learned more than 11% from equity as it has positive NPV. However, the bonds and preference have negative NPV, so they earn lesser.

2. If the total NPV is zero or greater (ie positive), then Linda earns 11% or more. Accordingly, NPV = 24646.58 - 18960.74 - 6314.4 = -628.56. Since, the NPV is negative, Linda earns slightly lesser than the 11%.

3.

Linda wishes to receive 8% for 9 years after 3 years from today. So, we take into consideration PV @ 8% from Year 4 to Year 12. So, PV Factor for 9 Years is 4.959. So, PV of minumum cash inflow store should generate => 285000/4.959 = 57471.

(The above is solved assuming we are in Year 0 and cashflows from store generate from year 4 (ie after selling shares at end of year 3 and investing proceeds into retail stores. However if we assume that we are in year 3 and wish to invest the proceeds in retail stores, we get PV Factor @ 8% from year 1 to 9 = 6.247. accordingly Rent will be 285000/6.247 = 45622)

(please comment in case of any query regarding the solution)

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