Docile Partners Limited (DPL) has two lines of business, organized as two divisions, A and B. Division A generates a risk-free cash flow. It will produce $1.79 million in free cash flow next year and it will grow at 1.19% each year thereafter forever. The second line of business, run by Division B, is risky. It expects to generate a cash flow of $3.03 million next year and will grow at a rate of 2.03%. Currently, the total market value of DPL is $116.8 million. The term structure of interest rates is flat at 3.44%. Show two decimal places for all your answers. (a) What is the dollar value of Division B? million (b) What is the cost of capital for Division B (in %)? % (c) Assume the company is planning on making an investment which will improve Division B's profitability. This project requires an initial investment of $6.8 million a year from now, and will increase cash flow by $0.96 million starting in year 2, as well as all future cash flows, so that their growth rate after year 2 remains the same as before. Assume that the cost of capital for division B is not affected by this project, and use this cost of capital to discount all cash flows from this project. If management decides to invest in this new technology, what will the market value of DPL be today (in million $)? million
Docile Partners Limited (DPL) has two lines of business, organized as two divisions, A and B. Division A generates a risk-free cash flow. It will produce $1.79 million in free cash flow next year and it will grow at 1.19% each year thereafter forever. The second line of business, run by Division B, is risky. It expects to generate a cash flow of $3.03 million next year and will grow at a rate of 2.03%. Currently, the total market value of DPL is $116.8 million. The term structure of interest rates is flat at 3.44%. Show two decimal places for all your answers. (a) What is the dollar value of Division B? million (b) What is the cost of capital for Division B (in %)? % (c) Assume the company is planning on making an investment which will improve Division B's profitability. This project requires an initial investment of $6.8 million a year from now, and will increase cash flow by $0.96 million starting in year 2, as well as all future cash flows, so that their growth rate after year 2 remains the same as before. Assume that the cost of capital for division B is not affected by this project, and use this cost of capital to discount all cash flows from this project. If management decides to invest in this new technology, what will the market value of DPL be today (in million $)? million
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 7P
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Transcribed Image Text:Docile Partners Limited (DPL) has two lines of business, organized as two divisions, A and B. Division A
generates a risk-free cash flow. It will produce $1.79 million in free cash flow next year and it will grow at 1.19%
each year thereafter forever. The second line of business, run by Division B, is risky. It expects to generate a
cash flow of $3.03 million next year and will grow at a rate of 2.03%. Currently, the total market value of DPL is
$116.8 million. The term structure of interest rates is flat at 3.44%. Show two decimal places for all your
answers.
(a) What is the dollar value of Division B?
million
(b) What is the cost of capital for Division B (in %)?
%
(c) Assume the company is planning on making an investment which will improve Division B's profitability. This
project requires an initial investment of $6.8 million a year from now, and will increase cash flow by $0.96
million starting in year 2, as well as all future cash flows, so that their growth rate after year 2 remains the
same as before. Assume that the cost of capital for division B is not affected by this project, and use this cost
of capital to discount all cash flows from this project. If management decides to invest in this new technology,
what will the market value of DPL be today (in million $)?
million
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