Stock Valuation Mathematics & Economics Essay Paper (Essay Sample)

STOCK VALUATION
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* Time Value of Money
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1 The free cash flow for UPS for the financial years 2015, 2016 and 2017 are $6082 million, $6007 million, and $3573 million, respectively. The present values for the cash flows are $5631.48 million, $5150.03 million and $2836.36 million, respectively. The figure have been calculated using a fixed interest rate of 8%. The cumulative present values for the annual cash flows is therefore $13,617.88.
2 If the risk of the company changes due to an unanticipated reduction in the cash flows by 10%, then the present values of the company will also change. The free cash flows will therefore change to 90% of the indicated value, and can therefore be calculated using the formula;
FCF1 = FCF * 0.9
Where FCF is the value of free cash flow before the 10% reduction, while FCF1 is the free cash flow value after the 10% reduction. The FCF values after the reduction are therefore $5473.80 million, $5406.30 million, $3215.70 million, for the years 2015, 2016 and 2017, respectively.
Present value is calculated using the formula;
PV = FV(1+i)-N…………………………1 CITATION Ekl13 \l 2057 (Eklund, 2013)
Where PV is the present value, FV the future value, i is the interest rate while n is the number of periods.