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you are running a hot internet company . Analysts predict that its earnings will grow at...

you are running a hot internet company . Analysts predict that its earnings will grow at 40% per year for the next five years. After That, as competition increases, earnings growth is expected to slow to 5% per year and continue at that level forever. your company just announced earnings of 4 million$. What is the present value of all future earnings if the interest rate is 9%?

The present value is --- Millions

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Answer #1
Required rate= 9.00%
Year Previous year earning earnings growth rate earnings current year Horizon value Total Value Discount factor Discounted value
1 4 40.00% 5.6 5.6 1.09 5.1376
2 5.6 40.00% 7.84 7.84 1.1881 6.59877
3 7.84 40.00% 10.976 10.976 1.295029 8.47549
4 10.976 40.00% 15.3664 15.3664 1.41158161 10.88595
5 15.3664 40.00% 21.51296 564.715 586.22796 1.538623955 381.00795
Long term growth rate (given)= 5.00% PV of earnings = Sum of discounted value = 412.11
Where
Current earnings=Previous year earning*(1+growth rate)^corresponding year
Total value = earning+ horizon value (only for last year)
Horizon value = earning Current year 5 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor
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