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Assume Joan started a business with an investment of $500,000 with an expected annual cash flow of $70.000. Cash flow is expected to grow @
Assume Joan started a business with an investment of $500,000 with an expected annual cash flow of $70.000. Cash flow is expected to grow @ 4% per annum, Joan has a required rate of return of 16% What is the market value of equity at time period 0 Show your answer using both the Gordon Model and forecasting out cash flows for 200 years. 5. After seven years of generating the expected cash flow Joan sells the business tp Sam. There is no change in expectations of future cash flows. What will the business sell for in year 7 and what rate of return will Joan earn? 6. Now assume that after seven years of generating the expected cash flow Joan and the potential buyer (Sam) expect cash flow to grow @ 5% per annum starting in year 8 What will the business sell for and what rate of return will Joan earn? 7. Sam purchased the business at the end of year seven and cash flows have followed the pattern above (ques. 6). At the end of year 12, Sam sells the business. The new buyer expects cash flows to continue to grow @ 5% per annum. What will the business sell at the end of vear 12 for and what rate of return will Sam realize? 8. Summarize how expectations impact firm value and return earned by buyers and sellers
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