A firm is projected to have a cash flow of $5,100 next year, after which the cash flow is expected to remain constant forever. What is the the terminal value of this cash flow at the end
Of this year if the cost of capital is 10%? Round your answer to the nearest dollar.

Question

Quizplus · Accepted Answer

The formula for calculating the terminal value of a perpetual cash flow is TV = CF/(r-g), where CF is the cash flow at the end of the projection period, r is the discount rate/cost of capital, and g is the expected growth rate (assuming it is zero in perpetuity). In this case, CF = $5,100, r = 10%, and g = 0% (since the cash flow is expected to remain constant forever). Plugging these values into the formula yields TV = $5,100/0.10 = $51,000. Rounded to the nearest dollar, the answer is (C) $51,000. To find the terminal value of the cash flow, we use the formula TV = CF/(r-g), where CF is the cash flow in the final year, r is the cost of capital, and g is the growth rate of the cash flow. Since the cash flow is expected to remain constant forever, g = 0. Therefore, TV = $5,100/0.10 = $51,000.

A Firm Is Projected to Have a Cash Flow of $5,100