Question

A firm's current profits are $1,400,000. These profits are expected to grow indefinitely at a constant annual rate of 4 percent. If the firm's opportunity cost of funds is 7 percent, determine the value of the firm:

Answer 1

Answer:

$ 48,533,333.33

Explanation:

The value of the firm now is the present value of its profits using the constant growth rate model formula as provided below:

PV of profits(value of the firm)=expected profits/(opportunity cost of funds-constant growth rate)

expected profits=current profits*(1+constant growth rate)

current profits =$1,400,000

constant growth rate=4%

expected profits=$1,400,000*(1+4%)

expected profits=$1,456,000

the opportunity cost of funds=7%

PV of profits(value of the firm)=$1,456,000/(7%-4%)

PV of profits(value of the firm)=$1,456,000/3%

PV of profits(value of the firm)=$ 48,533,333.33