Sparkling Water, Inc., expects to sell 2.81 million bottles of drinking water ea

Question

Sparkling Water, Inc., expects to sell 2.81 million bottles of drinking water each year in perpetuity. This year each bottle will sell for $1.30 in real terms and will cost $.91 in real terms. Sales income and costs occur at year-end. Revenues will rise at a real rate of 5 percent annually, while real costs will rise at a real rate of 4 percent annually. The real discount rate is 11 percent. The corporate tax rate is 35 percent.

What is Sparkling worth today? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

What is Sparkling worth today? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Explanation / Answer

Value of the firm = free cash flows of the firm / Capitalised rate

= 0.7645729 / 0.11

= 6.95 million

Free cash flow of firm

Sales price = $ 1.30 (1+0.05) = 1.365

Cost = $ 0.91 (1+ 0.04) = 0.9464

Revenue = 0.4186

sale units = 2.81 Million

Revenue = 1.176266

Tax@ 35 % = 0.4116931

free Cashflow net of tax = 0.7645729

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