Question

A firm's current profits are $400,000. These profits are expected to grow indefinitely at a constant annual rate of 4 percent. If the firm's opportunity cost of funds is 6 percent, determine the value of the firm
(a) the instant before its pays out current profits as devidens
(b) the instant after its pays out current profits as devidens

Answer 1

Answer:

value of the firm = 21.20 million

value of the firm =  20.80 million

Explanation:

given data

current profits = $400,000

annual rate = 4 percent

opportunity cost = 6 percent

solution

we get here value of the firm before pays out current profits as dividend is express as

value of the firm = current profits ( 1+opportunity cost  ) ÷ ( opportunity cost - annual rate ) ................1

put here value

value of the firm = $\frac{400000*(1+0.06)}{0.06-0.04}$  

value of the firm = 21.20 million

and

value of the firm after pays is

value of the firm = current profits ( 1+annual rate  ) ÷ ( opportunity cost - annual rate ) ................2

value of the firm =  $\frac{400000*(1+0.04)}{0.06-0.04}$  

value of the firm =  20.80 million