You are running a hot Internet company. Analysts predict that its earnings will grow at 40%...

You are running a hot Internet company. Analysts predict that its earnings will grow at 40% per year for the next five years. After that, as competition increases, earnings growth is expected to slow to 3% per year and continue at that level forever. Your company has just announced earnings of $5 million. What is the present value of all future earnings if the interest rate is 7%? (Assume all cash flows occur at the end of the year.)

Solutions

Expert Solution

Present value = PV of future earnings

Earnings Calculation:

Year	Earnings	Formula	Calculation
1	$ 7,000,000.00	D0 ( 1 + g)	5000000 ( 1 + 0.4 )
2	$ 9,800,000.00	D1 ( 1 + g)	7000000 * ( 1 + 0.4 )
3	$ 13,720,000.00	D2 ( 1 + g)	9800000 * ( 1 + 0.4 )
4	$ 19,208,000.00	D3 ( 1 + g)	13720000 * ( 1 + 0.4 )
5	$ 26,891,200.00	D4 ( 1 + g)	19208000 * ( 1 + 0.4 )
6	$ 27,697,936.00	D5 ( 1 + g)	26891200 * ( 1 + 0.03 )

value of future earnings at the end of Year 5 = Earnings for Year 6 / [ Required Ret - Growth Rate ]

= $ 27697936.00 / [ 7% - 3% ]

= $ 27697936 / 4%

= $ 692,448,400

PV of Earnings Today:

Year	Earnings	PVF@7%	PV of Earnings
1	$ 7,000,000.00	0.9346	$ 6,542,056.07
2	$ 9,800,000.00	0.8734	$ 8,559,699.54
3	$ 13,720,000.00	0.8163	$ 11,199,606.87
4	$ 19,208,000.00	0.7629	$ 14,653,691.23
5	$ 26,891,200.00	0.7130	$ 19,173,053.95
5	$ 692,448,400.00	0.7130	$ 493,706,139.21
PV of Earnings			$ 553,834,246.87

PV of earnings is $ 553,834,246.87

Pls comment, if any further assistance is required.

jeff jeffy answered 1 year ago

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