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In: Finance

A certain company?s cash flows are expected to grow at a rate of 15% for the...

A certain company?s cash flows are expected to grow at a rate of 15% for the next eight years before tapering off to a constant growth rate of 6% forever. The current year?s cash flow is $50,000 (already paid). If the firm?s cost of capital is 20%, what should its fair market value be? Round your answer to the nearest dollar.

A. $331,856

B. $888,126

C. $641,583

D. $309,727

Solutions

Expert Solution

Discount rate 20.0000%
Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow
                             -   0                                            -                                           -  
           57,500.000 1                             47,916.67                          47,916.67
           66,125.000 2                             45,920.14                          93,836.81
           76,043.750 3                             44,006.80                       137,843.61
           87,450.313 4                             42,173.18                       180,016.79
         100,567.859 5                             40,415.97                       220,432.76
         115,653.038 6                             38,731.97                       259,164.72
         133,000.994 7                             37,118.14                       296,282.86
         152,951.143 8                             35,571.55                       331,854.41
     1,158,058.655 8                           269,327.43                       601,181.84

Fair market value is 601,181.84 (please check the inputs given)

jeff jeffy answered 2 years ago
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