A firm\'s current profits arc $400,000. These profits are expected to grow indef

Question

A firm's current profits arc $400,000. These profits are expected to grow indefinitely at a constant annual rate of 4 percent. If the firm's opportunity cost of funds is 6 percent, determine the value of the firm The instant before it pays out current profits as dividends. The instant after it pays out current profits as dividends. What is the value of a preferred stock that pays a perpetual dividend of $125 at the end of each year when the interest rate is 5 percent? Complete the following table and answer the accompanying questions. At what level of the control variable are net benefits maximized? What is the relation between marginal benefit and marginal cost at this level of the variable?

Explanation / Answer

.4)

a. The value of the firm before it pays out current dividends is:

PV firm= $400,000((1 + 0.06) / (0.06 - 0.04)= $21.2 million

b. The value of the firm immediately after paying the dividend is:

PV Ex-Dividend firm= $400,000((1 + 0.04) / (0.06 - 0.04)= $20.8 million

Please note that only one question can be answered under each Q&A posted. Please ask other questions in another post. Thanks. Good Luck

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.