A firms current profits are $ 400,000. These profits are expected to grow indefinitely at a constant

Question:

A firm’s current profits are $ 400,000. These profits are expected to grow indefinitely at a constant annual rate of 4 percent. If the firm’s opportunity cost of funds is 6 percent, determine the value of the firm.

a. The instant before it pays out current profits as dividends.

b. The instant after it pays out current profits as dividends.

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...