Question

Value an umbrella stand that sells 38 umbrellas every day that it is rainy and when it is not. The probability of rain on any given day is 36%. Each umbrella sells for $5 and costs $1 to make. The business lasts 2 years and does not pay tax. The company has as much debt as it does equity. The cost of equity and cost of debt is 8% and 10%, respectively. Calculate the discounted cash flow and show all work.

Answer 1

Answer

Probability of Rain in a year=Number 0f days in a year* Probability

=365*36%=131.4

No of days it rains=131 days (Rounded)

Total number of umbrella sold in a year

=131*38

Number of umbrella sold in a year=4978 umbrella

Sellin price of a umbrella =$5

Cash received from umbrella sale=$5*4,978

Cash received from sale=$24,890

Cost of 1 umbrella=$1

Cash paid for umbrella=$1*4,978

Cash paid for umbrella=$4,978

Net cash flow earned in Year 1=$24,890-$4,978

Net cash flow earned in Year 1=$19,912

Net cash flow earned in Year 2=$19,912

Calculating cost of Company

WACC=Wd*Cost of debt+We*Cost of equity

=8*50%+10*50%

WACC=9%

Discounted cash flow= 19,912/(1.09)+19,912/(1.09)²

^{=(19,912/0.917)+(19,912/0.841)}

^{=$21,714+23,676}

^{Discounted cash flow=$45,390}