Evaluating the potential purchase of a small business currently generating

jagguarpaw January 16, 2017 0 Comments

Question: You are evaluating the potential purchase of a small…

You are evaluating the potential purchase of a small business currently generating $46,000 of​after-tax cash flow (D0 equals=​$46,000). On the basis of a review of​similar-risk investment​opportunities, you must earn a rate of return of 22​% on the proposed purchase. Because you are relatively uncertain about future cash​flows, you decide to estimate the​firm’s value using two possible assumptions about the growth rate of cash flows.
a. What is the​ firm’s value if cash flows are expected to grow at an annual rate of 0​% from now to​infinity?
b. What is the ​firm’s value if cash flows are expected to grow at a constant rate of 6​% from now to​infinity?

 

c. What is the ​firm’s value if cash flows are expected to grow at an annual rate of 11​% for the first 2​years,                            followed by a constant?

 

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a.   The ​firm’s value if cash flows are expected to grow at an annual rate of 0% from now to infinity is (Round to the nearest​dollar.)

 

b. The ​firm’s value if cash flows are expected to grow at a constant rate of 6​% from now to infinity is (Round to                     the nearest​dollar.)

 

c. The ​firm’s value if cash flows are expected to grow at an annual rate of 11​% for the first 2​years, followed by a                       constant annual rate of 6% from year 3 to infinity is (Round to the nearest​dollar.)