Final answer:
To calculate the enterprise value at the beginning of 2017 for year-end cash flows, discount future profits using a 15% interest rate to their present value. Sum these present values to find the total present value of all future cash flows. Then, divide by the number of shares to find the price per share, providing an estimate of the enterprise value.
Step-by-step explanation:
To calculate enterprise value at the beginning of 2017, assuming all cash flows occur at year-end, you will need to discount those future cash flows back to their present value. The process of discounting is based on the time value of money, which posits that a dollar today is worth more than a dollar in the future due to its potential earning capacity. The given interest rate for discounting these future profits is 15%.
First, you must calculate the present discounted value (PDV) for each future cash flow. This is done by applying the formula for PDV, which typically is PV = FV / (1 + r)^n, where PV is the present value, FV is the future value of the cash flow, r is the discount rate (interest rate), and n is the number of periods until the cash flow occurs.
After calculating the PDV for each period, you then sum these amounts to find the total present value of all future cash flows. If you have the total PDV of profits and the number of shares, you can then determine the price per share by dividing the total PDV by the number of shares. As provided in the example, with a total PDV of profits of 51.3 million and 200 shares, the price per share would be approximately $256,500.
The enterprise value is a measurement of a company's total value, often considered as a theoretical takeover price. In the context of this calculation, it is essential to note that expected profits and the appropriate discount rate can vary, making the calculated enterprise value a best estimate rather than an exact figure.