Question

The UCR Corp expects an earnings of $100,000 every year forever. The company currently has no debt, and its cost of equity is 15 percent. (a) If the corporate tax rate is 40 percent, what is the value of the company

Answer 1

Value of the company = $400,000

Step-by-step explanation:

The value of a firm is the present value of its stream of net cash flow discounted at the appropriate cost of capital. The appropriate cost of capital here is 15%.

Net cash flow = 100,000 - (40% × 100,000)= 60,000

Value of the company = A/r

A= 60,000, r-discount rate - 15%,

Value of the company = 60,000/0.15= $400,000

Value of the company = $400,000