What is the value of a firm whose current profits are $550,000 and are expected to grow at a constant rate of 5 percent indefinitely, given an opportunity cost of funds of 8 percent?
Explanation
The value of a going concern is the present value of its entire stream of current and future profits. When profits grow at a constant rate (g) that is less than the interest rate (i), a specific formula can be used to calculate this value, as shown on page 50.
Other questions
According to the textbook, what is the primary focus of managerial economics?
What is the key distinction between accounting profits and economic profits?
An entrepreneur invests $50,000 of her own money to start a business. Her explicit costs per year are $80,000 and her revenues are $150,000. She could have earned $60,000 per year working for another firm. What are her economic profits?
What is the primary role of economic profits in a free-market economy?
Which of the following is NOT one of the five forces that impact the sustainability of industry profits according to Michael Porter's framework?
What is the present value of receiving $150,000 at the end of five years if the opportunity cost of funds is 9 percent?
A firm is considering a project that costs $500,000 today. The project will generate year-end cash flows of $100,000 in year 1, $250,000 in year 2, and $300,000 in year 3. If the interest rate is 10 percent, what is the Net Present Value (NPV) of the project?
In the context of marginal analysis, when should a manager stop increasing the level of a control variable (like advertising or production)?
In the Slick Drilling Inc. example on page 58 (Table 1-2), what are the incremental revenues from adopting the new drilling project?
According to the textbook, consumer-producer rivalry, consumer-consumer rivalry, and producer-producer rivalry are three sources of rivalry that limit the power of buyers and sellers in what process?
Why was the manager in the Amcott headline case on page 34 fired?
Based on the data in Table 1-1 on page 53, what is the marginal cost of the fifth unit of the control variable Q?
An engineering firm's benefit and cost structure is given by B(Y) = 300Y - 6Y squared and C(Y) = 4Y squared. What level of Y maximizes net benefits?
What is meant by consumer-consumer rivalry?
In the context of the five forces framework, which of the following scenarios describes a high power of input suppliers?
If a manager must choose between two projects, one offering a certain profit of $5 million and another offering an expected profit of $5 million but with high variance, a risk-averse manager would:
The principle of marginal analysis states that optimal managerial decisions involve comparing the:
What does it mean for a manager to 'produce on the production function'?
In the airline club membership example in 'Inside Business 1-3', what is the present value of paying for a three-year membership annually at $125 per year, given a 5 percent interest rate?
A manager is defined as a person who:
The value of a firm is defined as the:
In the context of the five forces framework, which statement best describes the 'substitutes and complements' force?
When a firm's manager considers an incremental decision, such as the Slick Drilling Inc. project, which costs should be considered relevant?
What is the value of a preferred stock that pays a perpetual dividend of $75 at the end of each year when the interest rate is 4 percent?
According to the principle of maximizing short-term versus long-term profits, when does maximizing current (short-term) profits also maximize the value of the firm (long-term profits)?
What is the primary reason that a manager should ignore sunk costs when making decisions?
A computer firm that spends more resources on advertising has fewer resources to invest in research and development. This situation is an example of:
In the pizzeria example on page 39, the owner's accounting profit is $80,000. If the opportunity cost of the owner's time is $30,000 and the forgone rental value of the building is $100,000, what is the economic profit?
Which of the six principles of effective management deals with the fact that a dollar today is worth more than a dollar received in the future?