A firm's current profits are $1,400,000. These profits are expected to grow indefinitely at a constant annual rate of 4 percent. If the firm's opportunity cost of funds is 7 percent, determine the value of the firm: Instructions: Enter your responses rounded to two decimal places. a. The instant before it pays out current profits as dividends. $ 49933333.33 million b. The instant after it pays out current profits as dividends.

Question

Roberto Hendrix

Business

17 July, 20:05

A firm's current profits are $1,400,000. These profits are expected to grow indefinitely at a constant annual rate of 4 percent. If the firm's opportunity cost of funds is 7 percent, determine the value of the firm: Instructions: Enter your responses rounded to two decimal places. a. The instant before it pays out current profits as dividends. $ 49933333.33 million b. The instant after it pays out current profits as dividends.

+2

Answers (1)

Know the Answer?

Sincere · Answer 1

a. $49,933,333.33 million

b. $48,533,333.33 million

Explanation:

The computations are presented below:

a. For current profits as dividends in before case

= Profits * (1 + opportunity cost) : (opportunity cost - growth rate)

= $1,400,000 * (1 + 0.07) : (0.07 - 0.04)

= $1,400,000 * 35.6666

= $49,933,333.33 million

b. For current profits as dividends in after case

= Profits * (1 + growth rate) : (opportunity cost - growth rate)

= $1,400,000 * (1 + 0.04) : (0.07 - 0.04)

= $1,400,000 * 34.6666

= $48,533,333.33 million