Company ABC’s after-tax cash flow is $10 million (at the end of) this year and expected to grow at 5% per year forever. The appropriate discount rate is 9%. What is the value of company ABC?

• $111M
• $175M
• $238M
• $250M
• $275M

References

Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.

Solution: D

The value of company ABC is the PV of the growing annuity of cash flow:

PV = 10/(1.09−1.05) = $250 million.

References

Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.