Question

Ocho Corporation's net cash flows for the next three years are projected to be $2,000, $3,000, and $4,000, respectively. After that, the cash flows are expected to increase by 3.0 percent annually. What is the value of the firm if its weighted average cost of capital is 10 percent?

Group of answer choices

$32,281

$41,627

$51,523

$39,444

$47,126

Answer 1

Year	Cash Flow	PV Factor	PV Of Cash Flow
a	b	c=1/1.10^a	d=b*c
1	$     2,000	0.909090909	$                   1,818
2	$     3,000	0.826446281	$                   2,479
3	$     4,000	0.751314801	$                   3,005
PV of first three year cash flow			$                   7,303
Cash flow for year 4 = $4000*1.03 =$4120
Value of the first at the end of third year = $4120/(10%-3%)
		=$58857.14
PV of thease value = $58857.14/1.10^3
	=44220.24
Value of the firm = Pv of first three year cash flow + Pv of firm value at the end of third year
=$7303+44220
=$51523
Correct Option : THIRD
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