Question
Commonstockvalue Allgrowthmodels. Youareevaluatingthepotentialpurchaseofa smallbusinesscurrentlygenerating$45,000 ofafter-taxcashflow. Onthebasisofareviewof similar risk investmentopportunities,youmustearnarateofreturnof 21%ontheproposedpurchase.Becauseyouarerelatively uncertainaboutfuturecashflows,youdecidetoestimatethefirm'svalueusingtwopossibleassumptionsaboutthe growthrateofcashflows. a.Whatisthefirm'svalueifcashflowsareexpectedtogrowatanannualrateof 0%fromnowtoinfinity? b. Whatisthe firm'svalueifcashflowsareexpectedtogrowataconstantrateof 5%fromnowto infinity? c. Whatisthe firm'svalueifcashflowsareexpectedtogrowatanannualrateof 10 %forthefirst2 years,followedbya
Commonstockvalue Allgrowthmodels. Youareevaluatingthepotentialpurchaseofa smallbusinesscurrentlygenerating$45,000 ofafter-taxcashflow. Onthebasisofareviewof similar risk investmentopportunities,youmustearnarateofreturnof 21%ontheproposedpurchase.Becauseyouarerelatively uncertainaboutfuturecashflows,youdecidetoestimatethefirm'svalueusingtwopossibleassumptionsaboutthe growthrateofcashflows. a.Whatisthefirm'svalueifcashflowsareexpectedtogrowatanannualrateof 0%fromnowtoinfinity?
b. Whatisthe firm'svalueifcashflowsareexpectedtogrowataconstantrateof 5%fromnowto infinity?
c. Whatisthe firm'svalueifcashflowsareexpectedtogrowatanannualrateof 10 %forthefirst2 years,followedbya constantannualrateof 5%fromyear3toinfinity?
d. Show computations and/or formulas for the results.
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