Question

If you start up a business that cost $50,000 today and the business adopting no dividend policy for next 20 years. How much the business should worth at the end of the 20 years? If discount rate for this business be 15%.

Answer 1

The value of a $50,000 business after 20 years with a 15% discount rate is calculated using the future value formula.

Step-by-step explanation:

To determine how much a business that cost $50,000 today should be worth at the end of 20 years when adopting a no dividend policy, if the discount rate for this business is 15%, we need to calculate the future value of the $50,000 investment, compounded at the given discount rate over 20 years.

The formula to calculate future value (FV) is FV = PV x (1 + r)^n, where PV is the present value, r is the discount rate, and n is the number of periods. In this case, PV is $50,000, r is 15% or 0.15, and n is 20. Plugging these into the formula gives:

FV = $50,000 x (1 + 0.15)^20

This calculation will give us the expected worth of the business in 20 years.

Additionally, if a specific business, such as Babble, Inc., is anticipated to have future profits, these can be calculated using the present discounted value (PDV) method, as illustrated in the provided Babble, Inc. scenario. By using the Babble, Inc. example, investors would calculate the PDV of future profits and divide by the number of shares to determine the price per share they should pay.