Answered: A firm's current profits are $900,000.…

Economics Today and Tomorrow, Student Edition

1st Edition

ISBN:9780078747663

Author:McGraw-Hill

Publisher:McGraw-Hill

Chapter8: Business Organizations

Section: Chapter Questions

Problem 8AA

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Question

A firm's current profits are $900,000. These profits are expected to grow indefinitely at a constant annual rate of 2 percent. If the firm's opportunity cost of funds is 4 percent, determine the value of the firm:

(a). The instant before it pays out current profits as dividends

(b). The instant after it pays out current profits as dividends

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The cost of borrowing money annually, including fees, is stated as a percentage and is known as the APR (annual percentage rate. The APR is a more comprehensive indicator of how much borrowing money will cost you because it includes both interest rates and application fees.

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