Common stock

valuelong dashAll

growth modelsPersonal Finance ProblemYou are evaluating the potential purchase of a small business currently generating

$44500

of after-tax cash flow

(Upper D 0D0equals=$44,500).

On the basis of a review of similar-risk investment opportunities, you must earn a rate of return of

17%

on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using two possible assumptions about the growth rate of cash flows.

a. What is the firm's value if cash flows are expected to grow at an annual rate of

0%

from now to infinity?

b.What is the firm's value if cash flows are expected to grow at a constant rate of

6%

from now to infinity?

c.What is the firm's 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?