Abnormal Earnings

[Becoming An Actuary]

I remember getting something around 75000.

Something like {(NetIncome*.65+800)*.75}*1.05/(.11-.05)

since it's the FCF to Equity, I used the unleveraged rate 11%.

for the part where an additional 2000 is needed to maintain credit rating...

{(NetIncome*.65+800-2000)*.75}*1.05/(.11-.05)

[KindGrind]

you mean the FCFE right? not the abnormal earning question?

for part A I had (8400 - 840)*0.75/(0.11-0.05)

with the additionnal capital, I think it changed FCFE by -1500

[Becoming An Actuary]

but while we're on the topic...for the AE question

i got something like 117k. And I got the AE to decrease by 800 a year until it was zero...

[Becoming An Actuary]

Oh, and for some reason, I didn't include the OS Debt of 10k or whatever in the NI calculation....

[A-Head]

For the AE problem - first of all that was a pain computing with it going out 11 years or so. I got around 120-130k I think. What rate is are the AE discounted? 3% or 7%?

[KindGrind]

hmm
I had last year of the forecast to be like 5600, so I had it to decrease by 5600/6 per year (6th year = 0)

V = 100 000 + 3000/1.07 + 3650/1.07² + ... + 5600/1.07^5 + 4666.66/ 1.07^6 + ... + 933.33/1.07^10

I think I had around 128K - 132K, cant remember clearly

[Warren Schmidt]

but while we're on the topic...for the AE question

i got something like 117k. And I got the AE to decrease by 800 a year until it was zero...

I got the AE to decrease by 800 too....I want to say, though, that I got something like 130k? 100 for the initial capital, and then about 30k for the PV of abnormal earnings?

[KindGrind]

I think it was 7% : k = rf + B(rm - rf) = 3 + 2 ( 4 - 2 ) = 7
If I can recall correctly, that is.

[JustASix]

hmm
I had last year of the forecast to be like 5600, so I had it to decrease by 5600/6 per year (6th year = 0)

V = 100 000 + 3000/1.07 + 3650/1.07² + ... + 5600/1.07^5 + 4666.66/ 1.07^6 + ... + 933.33/1.07^10

I think I had around 128K - 132K, cant remember clearlyI did it this way (0 in 6th year) but I think it might be wrong. I doubt we will lose much for it though. I discounted at 7% though. I think I'm right there, but not sure.

[KindGrind]

yep, I corrected the discount rate...I got confused between 2 different questions... :)

[Warren Schmidt]

I'm confused....I could have sworn that the discount rate was 3% for this problem....but I do remember having to use CAPM of 3 + 2(2) = 7 to derive the discount rate at some point. Was this for the Abnormal Earnings problem or was this for a different problem?

[JustASix]

I'm confused....I could have sworn that the discount rate was 3% for this problem....but I do remember having to use CAPM of 3 + 2(2) = 7 to derive the discount rate at some point. Was this for the Abnormal Earnings problem or was this for a different problem?
3% was the risk free rate.

[A-Head]

Yeah, I went back and forth with using the risk free rate and the CAPM rate to discount. My brain wasn't really functioning at that time. I ended up using the risk free rate but oh well. Hopefully if I did the rest right, it's only a small fraction off.

[Warren Schmidt]

Yeah, I went back and forth with using the risk free rate and the CAPM rate to discount. My brain wasn't really functioning at that time. I ended up using the risk free rate but oh well. Hopefully if I did the rest right, it's only a small fraction off.

Neither was my brain. I think I computed the 7% discount rate, then determined the nominal earnings, and then forgot to discount them with the 7% but did it with the 3% instead!