You are evaluating the potential purchase of a small business currently generating ?$46,500 of? after-tax cash flow ?(D0equals=?$46,500?). On the basis of a review of? similar-risk investment? opportunities, you must earn a rate of return of 12?% on the proposed purchase. Because you are relatively uncertain about future cash? flows, you decide to estimate the? firm's value using two possible assumptions about the growth rate of cash flows.
a. What is the? firm's value if cash flows are expected to grow at an annual rate of 0?% from now to? infinity?
b. What is the? firm's value if cash flows are expected to grow at a constant rate of 8?% from now to? infinity?
c. What is the? firm's value if cash flows are expected to grow at an annual rate of 13?% for the first 2? years, followed by a constant annual rate of 8?% from year 3 to? infinity?