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A firm’s projected free cash flows are as follows: •year 1: $200,000 •year 2: $250,000 •year 3: $250,000 •year 4: $300,000 •year 5: $350,000 if the firm has a required rate of return of 10%, equity of $750,000, assets of $1,000,000, addition to retained earnings of $50,000, and net income of $225,000 in year 5: (a) what is the enterprise value of the firm using the internal growth rate as the long-term growth rate? (b) what is the enterprise value of the firm using the sustainable growth rate as the long-term growth rate? 6

User Mcarlin
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Final answer:

The enterprise value cannot be calculated without further information about the firm's retention ratio and return on equity, which are necessary for determining both the internal growth rate and the sustainable growth rate.

Step-by-step explanation:

The question is asking for the calculation of the enterprise value of a firm using both the internal growth rate and the sustainable growth rate as the long-term growth rate models. The enterprise value calculation includes projecting the free cash flows of the firm for the specified years and adjusting them using the required rate of return. It also involves adding the present value of the long-term growth rate cash flows beyond the specified time period. To calculate the enterprise value using the internal growth rate, we would need to find the growth rate that can be achieved with the firm's own resources without any external financing. This is typically calculated using the retention ratio and the return on equity. However, the question does not provide sufficient information to directly calculate the internal growth rate, so we cannot provide the enterprise value using this method without more data. Similarly, for the enterprise value using the sustainable growth rate, it's necessary to know the retention ratio and the return on equity which allows the calculation of sustainable growth rate as the product of these two. Again, we lack sufficient detail in the question to provide an answer. The provided information in the references does not directly correlate to the components needed to calculate either growth rate precisely.

User Tashera
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