Score: 0 of 10 pts 3 of 10(2 complete) HW Score: 20%, 20 of 100 pt P7-15 (simila

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Score: 0 of 10 pts 3 of 10(2 complete) HW Score: 20%, 20 of 100 pt P7-15 (similar to) Question Help Common stock valueAll growth models Personal Finance Problem You are evaluating the potential purchase of a small business currently generating $45,500 of after-tax cash flow D0-$45,500). On the basis of a reve of similar sk investment opportunities, you must earn a rate of return of 12% 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 8% from now to infinity? c What is the firm's value if cash flows are expected to grow at an annual rate o 12% for the frst year 3 to infinity? 2 years, followed by a constant annual rate of 8% from a. The firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity is S Round to the nearest dollar. Enter your answer in the answer box and then click Check Answer.

Explanation / Answer

a)Firm value =D0(1+g)/(Rs-g)

             = 45500(1+0)/(.12-0)

             = 45500/.12

            = $ 379,167

b)Firm value :45500(1+.08)/(.12-.08)

           = 45500*1.08/.04

          = 1,228,500

c)CF1=45500(1+.12)=50960

CF2 = 50960(1+.12) = 57075.2

Terminal value at year 2 = CF2(1+g)/(rs-g)

       = 57075.2(1+.08)/(.12-.08)

       = 57075.2*1.08/.04

       = 1541030.4

Firm value =[PVF12%,1*CF1]+[PVF12%,2*CF2]+[PVF12%,2*TV]

    =[.89286*50960]+[.79719*57075.2]+[.79719*1541030.4]

    = 45500.15+ 45499.78+ 1228494.02

    = $ 1,319,494

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