A firms current profits are 550000 These profits are expecte

A firm\'s current profits are $550,000. These profits are expected to grow indefinitely at a constant annual rate of 3 percent. If the firm\'s opportunity cost of funds is 5 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.

Solution

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

PV firm= $550,000((1 + 0.05) / (0.05 - 0.03) = $28,875,000

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

PV _{Ex-Dividend firm}= $550,000((1 + 0.03) / (0.05 - 0.03) = 28,325,000