A certain company's cash flows are expected to grow at a rate of 15% for the next eight years before tapering off to a constant growth rate of 6% forever. The current year's cash flow is
$50,000. If the firm's cost of capital is 20%, what should its fair market value be? Round your
Answer to the nearest dollar.

Question

Quizplus · Accepted Answer

The fair market value is calculated using the two-stage growth model. First, calculate the present value of cash flows for the high-growth period (8 years at 15%), then calculate the present value of the terminal value (constant growth at 6% thereafter) and sum them up.

A Certain Company's Cash Flows Are Expected to Grow at a Rate