Suppose the growth rate of the firm's profit is 7%, the interest rate is 10%, and the current profits of the firm are 120 million dollars.What is the value of the firm?
A)$44 million.
B)$4,280 million.
C)$4,400 million.
D)$6,800 million.

Question

Quizplus · Accepted Answer

According to the Gordon Growth Model, the value of the firm can be calculated as: 
(Value of the Firm) = (Current Profits) x (1 + Growth Rate) / (Discount Rate - Growth Rate)

Plugging in the values, we get: 
(Value of the Firm) = 120 x (1 + 0.07) / (0.10 - 0.07) 
(Value of the Firm) = 4,400 million

Therefore, the best choice is (C).

Suppose the Growth Rate of the Firm's Profit Is 7