Question

Common stock valuelong dashAll growth models Personal Finance Problem You are evaluating the potential purchase of a small business currently generating ​$42 comma 500 of​ after-tax cash flow ​(Upper D 0equals​$42 comma 500​). On the basis of a review of​ similar-risk investment​ opportunities, you must earn a rate of return of 18​% on the proposed purchase. Because you are relatively uncertain about future cash​ flows, you decide to estimate the​ firm's value using two possible assumptions about the growth rate of cash flows.

a. What is the​ firm's value if cash flows are expected to grow at an annual rate of 0​% from now to​ infinity?
b. What is the​ firm's value if cash flows are expected to grow at a constant rate of 7​% from now to​ infinity?
c. What is the​ firm's value if cash flows are expected to grow at an annual rate of 12​% for the first 2​ years, followed by a constant annual rate of 7​% from year 3 to infinity?

Answer 1

Step-by-step explanation:

Please check the attached files for workings

1. $45,475

2. P0 =D1/ (rs-g) rs= RF+ [b(rm-RF)]$50 = $3.00 / (rs- 0.09) 0.15 = 0.07 + [b(0.10 - 0.07)]rs= 0.15 b= 2.67