Posted: March 23rd, 2017
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 relatively
uncertain about future cash flows, you decide to estimate the firm’s value using
several possible assumptions about the growth rate of cash flows.
0% from now to infinity?
rate of 7% from now to infinity?
12% for the first 2 years, followed by a constant annual rate of 7% from year 3
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