A firm's current annual profit is $240,000

Economics May 19, 2021

A firm's current annual profit is $240,000. If the profit is expected to grow at an annual rate of 4.75% and the discount rate is 6%., what is the value of the firm? Round your final answer to the nearest dollar.
a) $20,112,000
b) $21,461,000
c) $20,352,000
d) $22,554000

Expert Solution

Computation of the value of firm:-

Value of firm = Annual profit * (1 + Growth rate) / (Discount rate - Growth rate)

= $240,000 * (1 + 4.75%) / (6% - 4.75%)

= $251,400 / 1.25%

= $20,112,000

Hence, the correct option is a) $20,112,000

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