Question

A mature communications company has earnings of $200M a year and is expected to have steady...

A mature communications company has earnings of $200M a year and is expected to have
steady earnings growth of 3% a year for the long-term.
What is the value of the company? Provide three values using three different risk rates (7%, 8% and 9%)
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Answer #1

Answer:

Value of the Company = Expected Earnings / (Risk Rate – Growth Rate)

Risk rate = 7%
Value of the Company = $200 Million / (0.07 – 0.03)
Value of the Company = $200 Million / 0.04
Value of the Company = $5,000 Million

Risk rate = 8%
Value of the Company = $200 Million / (0.08 – 0.03)
Value of the Company = $200 Million / 0.05
Value of the Company = $4,000 Million

Risk rate = 9%
Value of the Company = $200 Million / (0.09 – 0.03)
Value of the Company = $200 Million / 0.06
Value of the Company = $3,333.33 Million

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