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Homework answers / question archive / 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%
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%.
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%
