You own a store that is expected to make annual cash flows forever. The cost of capital for the store is 16.83 percent. The next annual cash flow is expected in one year from today and all subsequent cash flows are expected to grow annually by 1.68 percent.
What is the value of the store if you know that the cash flow in 5 years from today is expected to be 11,300?
Value of Firm:
When the expected cash flows are capitalized using the cost of capital, the value arrived is known as the value of the firm. A firm can also be valued using the product of total shares issued and market price per share.
Answer and Explanation: 1
The cash flows are expected till infinity, and the value of store would be computed using the capitalization method as shown below:
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fromChapter 21 / Lesson 15
An annuity is a type of savings account that pays back the investor in the future. Learn the formula used to calculate an annuity's value, and understand the importance of labeling specific numbers to calculate an output over time.