Question

Sparkling Water, Inc., expects to sell 2.83 million bottles of drinking water each year in perpetuity. This year each bottle will sell for $1.40 in real terms and will cost $.93 in real terms. Sales income and costs occur at year-end. Revenues will rise at a real rate of 6 percent annually, while real costs will rise at a real rate of 5 percent annually. The real discount rate is 10 percent. The corporate tax rate is 38 percent. What is the company worth today? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) Value of the firm $D

Answer 1

Present value of a perpetuity with constant growth = Perpetual revenue / ( Discount rate - growth rate )

= 1.40 / ( 0.10 - 0.06 )

= 35

Present value of costs = Perpetual costs / ( Discount rate - growth rate )

= 0.93 / (0.10 - 0.05 )

= 18.60

Today's worth of firm = Present value of Revenues - Present value of costs

= 35 - 18.60

= 16.4 * 1000,000 = 16,400,000