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2 May, 13:20

A firm's current profits are $1,400,000. These profits are expected to grow indefinitely at a constant annual rate of 4 percent. If the firm's opportunity cost of funds is 7 percent, determine the value of the firm: Instructions: Enter your responses rounded to two decimal places. a. The instant before it pays out current profits as dividends. $ 49933333.33 million b. The instant after it pays out current profits as dividends.

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  1. 2 May, 13:30
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    a. $49,933,333.33 million

    b. $48,533,333.33 million

    Explanation:

    The computations are presented below:

    a. For current profits as dividends in before case

    = Profits * (1 + opportunity cost) : (opportunity cost - growth rate)

    = $1,400,000 * (1 + 0.07) : (0.07 - 0.04)

    = $1,400,000 * 35.6666

    = $49,933,333.33 million

    b. For current profits as dividends in after case

    = Profits * (1 + growth rate) : (opportunity cost - growth rate)

    = $1,400,000 * (1 + 0.04) : (0.07 - 0.04)

    = $1,400,000 * 34.6666

    = $48,533,333.33 million
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