Question

Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock. How much is Dynamo worth today

Answer 1

$1,500

Explanation:

Relevant data provided

Annual cash flow = $150

Current Stock percentage = 10%

The computation of today value of Dynamo is shown below:-

Today value of Dynamo = Annual cash flow ÷ Current Stock percentage

= $150 ÷ 10%

= $150 ÷ 0.10

= $1,500

Therefore for computing the today value of Dynamo we simply divide the annual cash flow by current stock percentage.