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%) |
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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