A Certain Company's Cash Flows Are Expected to Grow at a Rate

question 14

Multiple Choice

A certain company's cash flows are expected to grow at a rate of 15% for the next eight years before tapering off to a constant growth rate of 6% forever. The current year's cash flow is
$50,000. If the firm's cost of capital is 20%, what should its fair market value be? Round your
Answer to the nearest dollar.

• A)$888,126
• B)$331,856
• C)$641,583
• D)$309,727

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Definitions:

American Put Option

A type of options contract that gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a predetermined price before or at a specified expiration date.

Market Interest Rates

The prevailing rate of interest available in the marketplace on investments and borrowing.

Exercise Price

The price at which the holder of an option can buy (for a call option) or sell (for a put option) the underlying asset.