Question

A firm's current profits are $600,000. 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:

Enter your responses rounded to two decimal places.

a. The instant before it pays out current profits as dividends.
   
    $ million

b. The instant after it pays out current profits as dividends.

    $ million

I need the answers ASAP PLEASE?

Answer 1

Answer:

i = cost of funds = 7%

g = growth rate = 4%

1. Before paying out dividends

PV = Profit * (1+i)/(i-g) = 600,000 * 1.07/(0.07-0.04) = 600,000 * 1.07/0.03 = $21,400,000 or 21.4 million

2. After paying out dividends:

PV = Profit * (1+g)/(i-g) = 600,000 * 1.04/(0.07-0.04) = 600,000 * 1.04/0.03 = $20,800,000 or 20.8 million

Therefore

a. The instant before it pays out current profits as dividends.
   
   $ 21.4 million

b. The instant after it pays out current profits as dividends.

    $ 20.8 million