Question

A firm's current profits are $650,000. These profits are expected to grow indefinitely at a constant annual rate of 5 percent. If the firm's opportunity cost of funds is 7 percent, determine the value of the firm:Round your responses to 2 decimal places.a. The instant before it pays out current profits as dividendsb. The instant after it pays out current profits as dividends.

Answer 1

before disrtibution of dividends: 34,125,000

after distribution: 33,475,000

Step-by-step explanation:

we will calculate this using the gordon model for dividen grow but using the firm income asdividends instead:

`(income_1)/(return-grow) = firm \: Value`

income zero: 650,00

income next year: 650,000 x 1.05 = 682,500

return 7%

grow 5%

`(682,500)/(0.07 - 0.05) = firm \: Value`

firm value: 34.125.000‬

once it distribute dividends, the equity will decrease by that ammount:

34,125,000 - 650,000 = 33,475,000