Question

A utilitiy company has had exactly the same earnings for the past 20 years of $10M...

A utilitiy company has had exactly the same earnings for the past 20 years of $10M a year
and has distributed all earnings to the shareholders. It is safe to assume that earnings

will remain the same and the company is going to continue distributing all earnings to shareholders.

What is the value of the company? Provide three values using three different risk rates (7%, 8% and 9%)

Homework Answers

Answer #1

Annual earnings = $10,000,000
Growth rate = 0%

If risk rate is 7%:

Value of Company = Annual earnings / (Risk rate - Growth rate)
Value of Company = $10,000,000 / (0.07 - 0.00)
Value of Company = $142,857,142.86

If risk rate is 8%:

Value of Company = Annual earnings / (Risk rate - Growth rate)
Value of Company = $10,000,000 / (0.08 - 0.00)
Value of Company = $125,000,000.00

If risk rate is 9%:

Value of Company = Annual earnings / (Risk rate - Growth rate)
Value of Company = $10,000,000 / (0.09 - 0.00)
Value of Company = $111,111,111.11

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