Refer to Scenario: Maritime.What is the horizontal value of Maritime's operation as of year 3?

A) $101.53 million
B) $98.57 million
C) $86.66 million
D) $71.07 million

Question

Refer to Scenario: Maritime.What is the horizontal value of Maritime's operation as of year 3?A) $101.53 millionB) $98.57 millionC) $86.66 millionD) $71.07 million

Clarke Davenport · Accepted Answer

Final Answer : A, Explanation :   The horizontal value of Maritime's operation as of year 3 can be calculated using the formula for a perpetuity from year 3 onwards:   P V = C F y e a r 4 r − g PV = \frac{CF_{year4}}{r-g} P V = r − g C F ye a r 4 ​ ​  , where   C F y e a r 4 CF_{year4} C F ye a r 4 ​   is the cash flow in year 4,   r r r   is the cost of equity, and   g g g   is the growth rate. The cash flow in year 4 is the year 3 cash flow grown by 3%, so   C F y e a r 4 = 6.9 × 1.03 = 7.107 CF_{year4} = 6.9 	imes 1.03 = 7.107 C F ye a r 4 ​ = 6.9 × 1.03 = 7.107   million. The cost of equity   r = 10 % r = 10\% r = 10%  , and the growth rate   g = 3 % g = 3\% g = 3%  . Plugging these into the formula gives   P V = 7.107 0.10 − 0.03 = 7.107 0.07 = 101.53 PV = \frac{7.107}{0.10 - 0.03} = \frac{7.107}{0.07} = 101.53 P V = 0.10 − 0.03 7.107 ​ = 0.07 7.107 ​ = 101.53   million.

Refer to Scenario: Maritime.What is the horizontal value of Maritime's operation as of year 3?

A) $101.53 million
B) $98.57 million
C) $86.66 million
D) $71.07 million

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