A firm's current annual profit is $320,000

Economics Dec 16, 2020

A firm's current annual profit is $320,000. If the profit is expected to grow at an annual rate of 2.25% and the discount rate is 3.75%, what is the value of the firm? Round your final answer to the nearest dollar.

Group of answer choices

$21,617,336

$21,813,333

$22,467,667

None of the answers listed is correct.

$22,133,333

Expert Solution

Computation of Value of Firm:

Value of Firm = Current Annual Profit*(1+Growth Rate)/(Discount Rate-Growth Rate)

= $320,000*(1+2.25%)/(3.75%-2.25%)

= $327,200/1.50%

Value of Firm = $21,813,333.33 or $21,813,333

So, the correct option is 2nd "$21,813,333".

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