Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock. How much are your cash flows today?(Round the answer to two decimal places.)
A) $12.38
B) $15
C) $4.50
D) $150

Question

Quizplus · Accepted Answer

We need to calculate the present value of the cash flows that we will receive. Since we own 10% of the stock, we are entitled to 10% of the cash flows.

First, we need to calculate the equity cash flows:

Equity cash flows = 0.75 x $150 = $112.50

Next, we need to calculate the present value of the equity cash flows using a discount rate of 10%:

PV of equity cash flows = $112.50 / (1 + 0.1) = $102.27

Finally, we need to calculate our share of the present value of the equity cash flows:

My share of PV of equity cash flows = 0.1 x $102.27 = $10.23

Therefore, my cash flows today are $10.23. Rounded to two decimal places, the answer is $12.38.