You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating $41,200 of free cash flow (FCF0= $41,200). On the basis of a review of similar-risk investment opportunites, you must earn a(n)19% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using several 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 annual 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 of13% for the first 2 years, followed by a constant annual rate of 6% from year 3 to infinity?
You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating $41,200 of free cash flow (FCF0= $41,200). On the basis of a review of similar-risk investment opportunites, you must earn a(n)19% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using several 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 annual 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 of13% for the first 2 years, followed by a constant annual rate of 6% from year 3 to infinity?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating
$41,200 of free cash flow (FCF0= $41,200). On the basis of a review of similar-risk investment opportunites, you must earn a(n)19% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using several 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 annual 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 of13% for the first 2 years, followed by a constant annual rate of 6% from year 3 to infinity?
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I already found the correct answers for a. and b. but they do not match what is here... The correct answer for a is 216842.11 and the answer to b is 335938.46. My issues is with part c, but using the incorrect calculations for a and b will still be incorrect. can you please use the correct answers and assist with part c?
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