Direccio Financera Semi 2, Ejercicios de Finanzas Empresariales

¡Descarga Direccio Financera Semi 2 y más Ejercicios en PDF de Finanzas Empresariales solo en Docsity!

Solucions Semi 2 QUESTION 1. Bill Clinton reportedly was paid $10 million to write his book My Way. The book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Given his popularity, assume that he could ear $8 million per year (paid at the end of the year) speaking instead of writing Assume his cost of capital is 10% per year. a. What is the NPV of agreeing to write the book (ignoring any royalty payments)? > a Book salary (S) = 10M | Cost of capital = 10% Years = 3 Opportunity cost (speeches salary) = $8M per year * 3 years = $24M Speeches satary_ We are comparing what Bill Clinten has eared (book salary) with (+cost of capital? potential earnings (speeches salary). If potential earnings are higher than actual earnings, NPV will be negative. Timeline: NPV = Book salary — a 24 NPV (in $M) = 10 =$ NPY (in $M) = -9.895 Therefore, íf Bill Clinton were to follow NPY criteria, he would not write a book and he would stick to making speeches. b. Assume that, once the book is finished, it is expected to generate royalties of $5 million in the first year (paid at the end of the year) and these royalties are expected to decrease at a rate of 30% per year in perpetuity. What is the NPV of the book with the royalty payments? o 1 o 4 Timeline: 10 E We already have the PV of the first three years (from t=0 to t=3) from the previous exercise: -59,89M We need to compute the PV of the royalties and combine the results: Note that from year 3 onwards, we have a decreasing rate of 30%. Let's compute the PV of these royalties at year 3 and then discount them to year 0. b. Assume that, once the book is finished, it is expected to generate royalties of $5 million in the first year (paid at the end of the year) and these royalties are expected to decrease at a rate of 30% (g= -0.3) per year in perpetuity. What is the NPV of the book with the royalty payments? Royalties are a declining perpetuity. Therefore, we only discount one-year income: C PV bectining perpetuity* =p = = $125 million = $9.39 million This it the value in year 3. Let's discount it to year 0: PV royalties = If we add this positive NPV to the negative NPV from a) part: NPV = -59.89M + $9.39M = -$503k