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marissa [1.9K]
3 years ago
14

Sparkling Water, Inc., expects to sell 3.7 million bottles of drinking water each year in perpetuity. This year each bottle will

sell for $1.46 in real terms and will cost $.82 in real terms. Sales income and costs occur at year-end. Revenues will rise at a real rate of 1.8 percent annually, while real costs will rise at a real rate of 1.1 percent annually. The real discount rate is 7 percent. The corporate tax rate is 25 percent. What is the company worth today?
Business
1 answer:
MrRa [10]3 years ago
3 0

Answer:

$39,345,664.93

Explanation:

The computation of the company worth today is as follows:

Present value of revenues after tax is

= $3,700,000 × 1.46 × (1 - 0.25) ÷ (0.07 - 0.018)

= $77,913,461.54

And, Present value of costs after tax is

= $3,700,000 × 0.82 × (1 -0.25) ÷ (0.07-0.011)

= $38,567,796.61

So, the company worth today is

=  $77,913,461.54 - $38,567,796.61

= $39,345,664.93

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In the given case, the art dealer claims his products being of high quality and appreciating over the period of next ten years. Such claims cannot be substantiated by any concrete evidence. As value cannot be ascertained in advance.

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