Common stock value All growth models. Personal Finance Problem. You are evaluating the potential purchase of a small business currently generating $40,000 of after-tax cash flow. The company has $25,000 of Preferred Stock and $150,000 of debt. (FCF0 = $40,000). On the basis of a review of similar-risk investment opportunities, you must earn a rate of return of 9% on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firms common stock value using three possible assumptions about the growth rate of cash flows.

1. What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity?

2. What is the firm's value if cash flows are expected to grow at a constant rate of 6% from now to infinity?

3. What is the firms common stock value if cash flows are expected to grow at an annual rate of 10% for the first 2 years, followed by a constant annual rate of 6% from year 3 to infinity?