Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock. How much is Dynamo worth today?
A) $1,765
B) $1,500
C) $2,143
D) None of the above

Question

Quizplus · Accepted Answer

Dynamo Corp. is valued as a perpetuity, so its value is calculated as cash flow divided by the discount rate: $150 / 0.10 = $1,500.