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Suppose the growth rate of the firm's profit is 7 percent, the interest rate is 10...

Suppose the growth rate of the firm's profit is 7 percent, the interest rate is 10 percent, and the current profits of the firm are $120 million. What is the value of the firm?

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Answer #1

The formula for Present Value of a firm is:

PV of a firm= Current profits × {(1+i)/(i-g)}

where, i = interest rate

g= growth rate

Value of a firm= $ 120 million × { (1+.1)/(.1-.07)}

= 120 million × ( 1.1/.03)

= 120 million × 36.667

= 4400 million

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