Tech Geek Inc. (a publicly traded spinoff of ITech Geek) has retain KHJ Consulting to answer the following questions:
1. Tech Geek is interested in establishing a valuation estimate and how this estimate was arrived at for their firm. Tech Geek is a constant growth perpetuity with for last ????????????????0year equal to $250M. The growth rate in their has been constant at 4% annually ????????????????for several years now and is expected to remain so into the future. Tech Geek is financed with 50% debt and 50% equity. Their outstanding debt, originally issued in $1,000 increments, is trading at $800 with 10 years remaining, on average. The debt was originally issued at a coupon rate of 10% annually. Tech Geek equity is also publicly traded. Currently, the standard deviation of the returns on the market portfolio is 12% ( . The covariance between the returns on Tech Geek equity and the returns of ????????= .12)the market portfolio is 2.16% (. Finally, the current and ????????,????????????????????????????= .0216)????????=2%????(????????)=5%. Tech Geek has hired us to explain the valuation process for their firm and provide a current estimate of the overall value of Tech Geek.
2. Tech Geek likes to use IRR (Internal Rate of Return) as their main methodology for answering capital budgeting questions. Explain to Tech Geek why NPV (Net Present Value) is the superior capital budgeting methodology taking care to note the specific problems of nonconventional cash flows and mutually exclusive projects and the use of IRR.
3. Tech Geek has heard this all before about capital budgeting and has shifted to using Modified IRR for its capital budgeting decision making in response. Provide examples and explain to Tech Geek why Modified IRR has its on set of problems when it comes to capital budgeting.
