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An all equity capitalized firm (i.e., no debt in the capital structure) is expected to produce a cash flow in the amount of $900,000 in its first year of operation. Cash flow is expected to grow at 2% annually for the foreseeable future each year thereafter. If the firm's investors require a 10% return, what is the estimated Market Value of the Firm

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Tundexi

Answer:

Explanation:

Cash flow at end of year 1 = $900,000

Growth rate = 2%

Required rate of return = 10%

Estimated Market value = Cash flow at end of year 1  / (Required rate of return  - Growth rate}

Estimated Market value = $900,000 / (0.10 - 0.02)

Estimated Market value = $900,000 / 0.08

Estimated Market value = $11,250,000

So, the the estimated Market Value of the Firm is $11,250,000

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