Final answer:
Using the Gordon Growth Model with the provided profits of $850,000, a growth rate of 5%, and an opportunity cost of 8%, yields a firm value calculation that does not match any of the provided options. There appears to be an error in the question or options. The calculated value of the firm is $28,333,333.33.
Step-by-step explanation:
To determine the value of the firm based on the given profits, we need to use the Gordon Growth Model, which is a version of the dividend discount model that assumes dividends will increase at a constant growth rate indefinitely. The formula for this model is:
Value of the firm = Annual Profits / (Opportunity Cost of Funds - Growth Rate)
In this case, the annual profits are $850,000, expected to grow indefinitely at a constant annual rate of 5%, and the opportunity cost of the funds is 8%. Applying the formula gives us:
Value of the firm = $850,000 / (0.08 - 0.05) = $850,000 / 0.03 = $28,333,333.33
However, since none of the provided options match this result, it seems there might be an error in the question or the options given.
Normally, the correct approach would be to use the formula provided, compare the calculated value with the provided options, and choose the closest one if it's reasonable.