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 it pays out current profits as dividends.

Answer 1

Answer:

$20,800,000

Explanation:

The formula and computation is shown below:

Value of the firm = {(Firm's current profits) × (1 + firm’s opportunity cost of funds)} ÷ (firm’s opportunity cost of funds - constant growth annual rate)

= {($400,000) × (1 + 0.06) ÷ (0.06 - 0.04)

= $424,000 ÷ 0.02

= $21,200,000

Hence, we recognized all the information which is mentioned in the question.