FIN 504- Common stock value: All growth models
Question 7-15Common stock value: All growth modelsYou are evaluating the potential purchase of a small business currently generating $42,500 of after-tax cash flow (D0 = $42,500). On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm’s value using several possible assumptions about the growth rate of cash flows.What is the firm’s value if cash flows are expected to grow at an annual rate of 0% from now to infinity?To answer this would you use the Zero Growth Model (D1/rs) or $42,500/18%, or would you use the Constant-growth model (D1/rs-g) or $42,500/.18-0 ?
