Question
My friend Steve has a consulting business that generates free cash flows of approximately $140,000/year after-taxes and he expects no growth over the remaining 10
My friend Steve has a consulting business that generates free cash flows of approximately $140,000/year after-taxes and he expects no growth over the remaining 10 years of his working life (assume he would not be able to sell the consulting business when he retires).When valuing his consulting business, he is considering the value of the option to expand his consulting business in the future if business did grow (he is an optimist).Steve has estimated that the capital expenditures necessary to expand his consulting business would be approximately $100,000 and this expansion would increase the after-tax cash flows of the consulting business by 20% (from $140,000 per year for the remaining years to $168,000 per year for the remaining years).Assuming the appropriate risk-adjusted discount rate for the after-tax cash flows derived from the consulting business is 25%/year and the standard deviation of the returns from this type of consulting business is 80% per year, what is the value of his option to expand the consulting business?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To calculate the value of Steves option to expand his consulting business we can use the BlackSchole...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started