Question

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 =

Answer 1

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