Personal Finance Problemler P7-15 Common stock value: All growth models You are evaluating the potential...
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Personal Finance Problemler P7-15 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 (Do = $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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