Ray's Jams Inc.was just established with an investment of $5 million in stereo equipment.Ray expects his company to generate $800,000 a year for the next 200 years.If Ray's cost of capital is 15%,find the market value and book value of his company.
A) market value = $9.0 million; book value = $5.0 million
B) market value = $5.0 million; book value = $5.3 million
C) market value = $5.33 million; book value = $5.0 million
D) market value = $7.0 million; book value = $5.0 million

Question

Quizplus · Accepted Answer

The market value of the company can be calculated using the formula:
Market value = Present value of expected cash flows / Cost of capital
= ($800,000/0.15) x (1 - 1/1.15^200)
= $5.33 million
Book value of the company is the initial investment of $5 million. Therefore, the correct option is C.