Given the following information for a company in a developing market,estimate the value of the company.The cash for the next year is estimated to be either $200 in the business-as-usual scenario or $50 in the distress scenario.The probabilities of the scenarios are 80 percent and 20 percent,respectively.The expected perpetual growth rate in each case is 5 percent per year,and the cost of capital is 11 percent.The value of the company is closest to:

Question

Quizplus · Accepted Answer

To estimate the value of the company, we need to calculate the present value of the cash flows in each scenario and take the weighted average.

In the business-as-usual scenario with 80% probability, the cash flow next year is $200, and the perpetual growth rate is 5%. Using the formula for the present value of a growing perpetuity, we get:

PV = CF/(r-g) = $200/(0.11-0.05) = $3,333.33

In the distress scenario with 20% probability, the cash flow next year is $50, and the perpetual growth rate is also 5%. Using the same formula, we get:

PV = CF/(r-g) = $50/(0.11-0.05) = $833.33

Taking the weighted average of these two values based on their probabilities, we get:

PV = 0.8*$3,333.33 + 0.2*$833.33 = $2,833.33

Therefore, the best choice is C) $2,833.33.

Given the Following Information for a Company in a Developing