Suppose the growth rate of the firm's profit is 5%, the interest rate is 6%, and the current profits of the firm are 100 million dollars

Economics Apr 01, 2021

Suppose the growth rate of the firm's profit is 5%, the interest rate is 6%, and the current profits of the firm are 100 million dollars. What is the value of the firm? a. $111.5 million b. $1,766.6 million C $10,600 million None of the statements associated with this onestion are correct

Expert Solution

Answer

d .

Explanation

Computation of Value of Firm:

Value of Firm = Current Profits*(1+Growth Rate)/(Interest Rate-Growth Rate)

= $100 millions*(1+5%)/(6%-5%)

Value of Firm = $10,500 millions

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