Question

Suppose the growth rate of the firm's profit is 7 percent, the interest rate is 10 percent, and the current profits of the firm are $120 million. What is the value of the firm

Answer 1

$4,400,000,000

Step-by-step explanation:

The formula is shown below together with the computation.

Value of the firm = [(Firm's current profit ) × (1 + firm's opportunity cost of funds/Interest rate)] ÷ (Firm's opportunity cost of funds/Interest rate - Constant growth annual rate)

= [($120,000,000) × (1 + 10%)] ÷ (10% - 7%)

= [($120,000,000) × (1.1)] ÷ (0.1 - 0.07)

= $120,000,000 × 1.1 ÷ 0.03

= $132,000,000 ÷ 0.03

= $4,400,000,000