Question

Please Help!!

Your firm just finished the year, in which it had cash earnings of $400. You forecast your firm to have a quick growth phase from year 0 to year 5, in which it grows at a rate of 40% per annum. Your firm’s growth then slows down to 20% per annum between year 5 to year 10. Finally, beginning in year 11, you expect the firm to settle into its long-term annual growth rate of 2% . You also expect your cost of capital to be 15% over the first 5 years, then 10% over the next 5 years, and 8% thereafter. What do you think your firm is worth today? (Advice: Use a computer spreadsheet program.)

My answer was $41,387 just making sure this is right!

Answer 1

		Year	Earning	Cost of capital	Present Value (PV)
	A	0	$400	15%	$400.00	PV at year 0
	B=A*1.4	1	$560	15%	$486.96	PV at year 0
	C=B*1.4	2	$784	15%	$592.82	PV at year 0
	D=C*1.4	3	$1,098	15%	$721.69	PV at year 0
	E=D*1.4	4	$1,537	15%	$878.58	PV at year 0
	F=E*1.4	5	$2,151	15%	$1,069.57	PV at year 0
	G=F*1.2	6	$2,581.56	10%	$2,346.87	PV at Year 5
	H=G*1.2	7	$3,097.87	10%	$2,560.22	PV at Year 5
	I=H*1.2	8	$3,717.44	10%	$2,792.97	PV at Year 5
	J=I*1.2	9	$4,460.93	10%	$3,046.87	PV at Year 5
	K=J*1.2	10	$5,353.11	10%	$3,323.86	PV at Year 5
	L=K*1.02	11	$5,460.18	8%
		PV at Year 10 for Earning from Year 11 to perpetuity	$91003	(5460.18/(0.08-0.02))
		PV at Year 5 for Earning from Year 11 to perpetuity	$56505.70	(91003/(1.1^5)
	A	PV at Year 0 for Earning from Year 11 to perpetuity	$28093.32	(56505.70/(1.15^5)
		PV at year 5 for earning of year6 to10	$14,070.79	((2346.87+2560.22+2792.97+3046.87+3323.86)
	B	PV at year 0 for earning of year6 to10	$6,995.67	(14070.79/(1.15^5)
	C	PV at year 0 for earning of year0 to 5	$4,149.62	(400+486.96+592.82+721.69+878.58+1069.57)
	W=A+B+C	Firm's Worth Today	$39238.61
		Answer should be $39238.61