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HRC is currently generating $42,500 of after-tax cash flow. Based on a review of similar risk investment opportunities, CSL feels that it must earn 18

HRC is currently generating $42,500 of after-tax cash flow. Based on a review of similar risk investment opportunities, CSL feels that it must earn 18 percent rate of return on the proposed purchase - as future cash flows are uncertain. CSL is trying to determine the value of HRC using some growth assumptions for cash flow. HRC has 100,000 common shares outstanding.

Required: Determine the value of HRC if:

  1. The cash flow is expected to remain at the current level

from now to infinity? (2 Marks)

  1. The cash flows are expected to grow at 6 percent to infinity (3 Marks)
  2. The cash flows are expected to grow at an annual rate of 12% for

the first 3 years followed by a constant annual growth rate of 6%

in year 4 to infinity? (6 Marks)

  1. Explain the reason HRC value being different for the various scenarios? (1 Marks)

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