A firm is currently valued at $10.6 million. This year's cash flow was $0.6 million, and the firm's cash flow is expected to grow at a constant rate indefinitely. If the cost of capital of the
Firm is 14.1%, what is the implied growth rate of the cash flows? Round your answer to the
Nearest tenth of a percent.

Question

Quizplus · Accepted Answer

The implied growth rate (g) can be calculated using the Gordon Growth Model: Value = Cash Flow / (Cost of Capital - Growth Rate). Rearranging gives Growth Rate = Cost of Capital - (Cash Flow / Value). Substituting the given values: 14.1% - (0.6 / 10.6) = 8.0%.

A Firm Is Currently Valued at $10