Question: Common stock value – All growth models. Personal Finance Problem. You are evaluating thepotential purchase of a small business currently generating $40,000 of after-tax cash flow. Thecompany has $25,000 of Preferred Stock and $150,000 of debt.(FCF0 = $40,000). On the basis of a review of similar-risk investment opportunities, you must earn arate of return of Common stock value – All growth models. Personal Finance Problem. You are evaluating thepotential purchase of a small business currently generating $40,000 of after-tax cash flow. Thecompany has $25,000 of Preferred Stock and $150,000 of debt.(FCF0 = $40,000). On the basis of a review of similar-risk investment opportunities, you must earn arate of return of 9% on the proposed purchase. Because you are relatively uncertain about future cashflows, you decide to estimate the firm’s common stock value using three possible assumptions aboutthe growth rate of cash flows. 1. What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity? 2. What is the firm's value if cash flows are expected to grow at a constant rate of 6% from now to infinity? 3. What is the firms common stock value if cash flows are expected to grow at an annual rate of 10% for the first 2 years, followed by a constant annual rate of 6% from year 3 to infinity?
Question: Common stock value – All growth models. Personal Finance Problem. You are evaluating thepotential purchase of a small business currently generating $40,000 of after-tax cash flow. Thecompany has $25,000 of Preferred Stock and $150,000 of debt.(FCF0 = $40,000). On the basis of a review of similar-risk investment opportunities, you must earn arate of return of Common stock value – All growth models. Personal Finance Problem. You are evaluating thepotential purchase of a small business currently generating $40,000 of after-tax cash flow. Thecompany has $25,000 of Preferred Stock and $150,000 of debt.(FCF0 = $40,000). On the basis of a review of similar-risk investment opportunities, you must earn arate of return of 9% on the proposed purchase. Because you are relatively uncertain about future cashflows, you decide to estimate the firm’s common stock value using three possible assumptions aboutthe growth rate of cash flows. 1. What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity? 2. What is the firm's value if cash flows are expected to grow at a constant rate of 6% from now to infinity? 3. What is the firms common stock value if cash flows are expected to grow at an annual rate of 10% for the first 2 years, followed by a constant annual rate of 6% from year 3 to infinity?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question: Common stock value – All growth models.
Personal Finance Problem. You are evaluating thepotential purchase of a small business currently generating $40,000 of after-tax cash flow. Thecompany has $25,000 ofPreferred Stock and $150,000 of debt.(FCF0 = $40,000). On the basis of a review of similar-risk investment opportunities, you must earn arate of return ofCommon stock value – All growth models. Personal Finance Problem. You are evaluating the
potential purchase of a small business currently generating $40,000 of after-tax cash flow. The
company has $25,000 of Preferred Stock and $150,000 of debt.
(FCF0 = $40,000). On the basis of a review of similar-risk investment opportunities, you must earn a
rate of return of 9% on the proposed purchase. Because you are relatively uncertain about future cash
flows, you decide to estimate the firm’s common stock value using three possible assumptions about
the growth rate of cash flows.
1. What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity?2. What is the firm's value if cash flows are expected to grow at a constant rate of 6% from now to infinity?
3. What is the firms common stock value if cash flows are expected to grow at an annual rate of 10% for the first 2 years, followed by a constant annual rate of 6% from year 3 to infinity?
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