The estimated cost of capital for Zeta Corporation is 10.44%.The company is expected to produce €35 million in cash flows at the end of this year,and that this number will grow by 5% per year for ever.Find the value of Zeta Corporation.

Question

Quizplus · Accepted Answer

Using the perpetuity formula, we can find the present value of the cash flows:
PV = CF / r
where CF is the cash flow in the first year, and r is the cost of capital.
PV = €35 million / 0.1044 = €335.2535 million (rounded to nearest cent)
Then, we can find the value of the corporation by adding the present value of the perpetuity of cash flows to the PV of the cash flow in the first year:
Value = PV + (CF * (1+g) / (r-g))
where g is the growth rate of the cash flows.
Value = €335.2535 million + (€35 million * 1.05) / (0.1044 - 0.05) = €643.38 million (rounded to nearest cent)
Therefore, the best choice is D with the value of €643.38 million.

The Estimated Cost of Capital for Zeta Corporation Is 10