Cash flows are expected to grow at an annual rate

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Reference no: EM131606175

You are evaluating the potential purchase of a small business currently generating $40,500 of after tax cash flow (Do =$40,500). On the basis of a review of similar risk investment opportunties you ust earn a rate of return of 15% on the proposed purchase. becasuse you are relatiely uncertain about future cash flows you decide to estimate the firm's value using two possible assumptions about the rowth rate of cash flows.

a. what is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity?

b. what is the firm's value if cash flows are expected to grow at a constant rate of 7% from now to infinity?

c. what is the firm's value if cash flows are expected to grow at an annual rate of 12% for the first 2 years followed by a constant annual rate of 7% from year 3 to infinity?

Reference no: EM131606175

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