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Gumtree Ltd will invest in an asset that is currently trading at $171,000. This is expected...

Gumtree Ltd will invest in an asset that is currently trading at $171,000. This is expected to generate a quarterly cash flow that grows at a constant rate of 6% p.a. compounded quarterly. The expected cost of capital is 10% p.a. compounded annually. How much would the first cash flow be from such an asset?

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Expert Solution

quarterly cost of capital=(1+10%)^(1/4)-1=2.4114%

First cash flow=Current price of asset*(quarterly cost of capital-quarterly growth rate)=171000*(2.4114%-6%/4)
=1558.441

jeff jeffy answered 2 years ago
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