Question

Suppose that you are starting a firm that will export goods to another country. It will take a while to break into the market, so your company is projected to have losses of $150,000 this year and next year (years 0 and 1), and then profits of $190,000 for each of the 3 years after that (years 2, 3, and 4). For simplicity, assume that the firm won’t exist after that. Also assume that you use a 4% discount rate. According to the theory and formula given in class (which is slightly different from the related one in your book), what is the value of this firm? If there are 200 shares of this firm, what is the theoretical price per share for this firm?

Answer 1

Value of firm will be equal to it's NPV.

NPV= CASH FLOW  / (1 + DISCOUNT RATE )

N = Number of Time Periods

NPV = -150000 - $150,000 /1.04 + $190,000 / (1.04)^2 + $190,000 / (1.04)^3 + $190,000 / (1.04)^4

NPV = $212,757.02

Since, Value of Firm = Number of Shares Price per share

Therefore , Price per share = $212,757.02 / 200

= $ 1063.7851