Business, 19.07.2019 22:10 NotAPDB111

Common stock value: all growth models you 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 rel- atively uncertain about future cash flows, you decide to estimate the firm’s value us- ing several possible assumptions about the growth rate of cash flows. a. what is the firm’s value if cash flows are expected to grow at an annual rate of 0% from now to infinity? b. what is the firm’s value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity? c. what is the firm’s value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity?

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