Question

# Sparkling Water, Inc., expects to sell 3.7 million bottles of drinking water each year in perpetuity....

 Sparkling Water, Inc., expects to sell 3.7 million bottles of drinking water each year in perpetuity. This year each bottle will sell for \$1.46 in real terms and will cost \$.82 in real terms. Sales income and costs occur at year-end. Revenues will rise at a real rate of 1.5 percent annually, while real costs will rise at a real rate of .9 percent annually. The real discount rate is 6 percent. The corporate tax rate is 25 percent.

 What is the company worth today?

Value of the firm =

Let us first find PV of revenue

PV of revenue = (No of bottle to be sold x price per bottle)/ Required rate of return - growth rate

= (3.7 million x 1.46) / 6%-1.5%

= 5.402 million / 4.5%

=\$ 120.04 million

PV of cost = (No of bottle to be sold x cost per bottle)/ Required rate of return - growth rate

= (3.7 million x 0.82) / 6%-0.9%

= 3.034 million / 5.1%

=\$ 59.49 million

Thus profit = 120.01 - 59.49 = 60.55 million

Thus after tax profit = 60.55 million(1-25%)

= 60.55 million(0.75)

= \$ 45.42 million

Thus vale of company = \$45.42 million