Assume an interest rate of 5% and the future firm’s profit growth rate of 3%. Given...
Assume an interest rate of 5% and the future firm’s profit growth rate of 3%. Given that current profits are $150 million, then
What's the value of the firm?
What's the value of the firm after paying dividends equal to its current profits?
Please show calculations.
Homework Answers
1)
What's the value of the firm
=(current profit*(1+g))/(r-g)
=(150*(1+3%))/(5%-3%)
=7725 million
2)
when a firm pays dividend=current profits, that means plowback ratio is 0% which means growth rate will be=0%
What's the value of the firm after paying dividends equal to its current profits
=(current profit*(1+g))/(r-g)
=(150*(1+0%))/(5%-0%)
=3000 million
the above is answer..
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