Estimate a venture's required rate of return based on the following information: terminal value = $400,000; current year's net income = $20,000; next year's expected cash flow = $25,000; and a constant growth rate = 7%

Finance Aug 09, 2020

Estimate a venture's required rate of return based on the following information: terminal value = $400,000; current year's net income = $20,000; next year's expected cash flow = $25,000; and a constant growth rate = 7%.

Expert Solution

Computation of the required rate of return:-

Terminal Value = Cash flow in next year / (Required rate of return - Growth rate)

$400,000 = $25,000 / (Required rate of return - 7%)

Required rate of return - 7% = $25,000 / $400,000

Required rate of return = 6.25% + 7%

= 13.25%

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