Question

Suppose the interest rate is 5 percent, the expected growth rate of the firm is 2 percent, and the firm is expected to continue forever. If current profits are $1,000, what is the value of the firm

Answer 1

Answer: $35,000

Explanation:

Value of firm = Current profit + Present value of perpetual profit

Present value of perpetual profit:

= (Profits * (1 + growth rate)) / (Interest rate - growth rate)

= (1,000 * (1 + 2%)) / (5% - 2%)

= $34,000

Value of firm = 1,000 + 34,000

= $35,000