Question

The subsidiaries of Perth International remit their earnings and investment proceeds to the Australian parent at the end of each year. The annual weighted average cost of capital or required rate of return of Perth International is 6.93 per cent.

Calculate the current value of the Perth International Co. using its expected cash flows in year-one, year-two and year-three. (enter the whole number with no sign or symbol).

Answer 1

To calculate the current value of Perth International Co., we need to discount the future cash flows back to the present using the required rate of return of 6.93 per cent. After calculating the present values, adding them up provides the company's current valuation, which can then be divided by the number of shares if needed.

Step-by-step explanation:

To calculate the current value of Perth International Co. using its expected cash flows in year one, year two, and year three, we must discount those cash flows back to their present value at the company's required rate of return of 6.93 per cent.

Each year's cash flow should be divided by (1 + 0.0693)^n, where n is the year number corresponding to the cash flow.

Adding up all present values for the different time periods will give us the current value of the company.

If an investor were to choose a different interest rate, say 15%, this rate would factor in the opportunity cost of investing financial capital and a risk premium.

This higher rate would result in different present value calculations, acknowledging that expected profits are estimations and involve a degree of risk.

The calculated present value of total profits would then be divided by the number of shares to find the price per share.