You are evaluating the potential purchase of a small business currently generating $44,000 if after-tax cash flow (D0= $44000). On the basis of a review of similar-risk investment opportunities, you must earn a rate of return of 21% on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firms value using two possible assumptions about the growth rate of cash flows.
a) The firms cash value if cash flows are expected to grow at an annual rate of 0% from not to infinity is?
b) The firms value if cash flows are expected to grow at a constant rate of 6% from now to infinity is?
c) The firms value if cash flows are expected to grow at an annual rate of 9% for the first two years, followed by a constant annual rate of 6% from year 3 to inifinity is?