Water Corp expects to sell 2.1 million bottles of drinking water each year into perpetuity. This year each bottle will sell for $1.25 in real terms and will cost $.75 in real terms. Sales income and costs occur at year end. Revenues will rise at a real rate of 6 per cent annually, while real costs will rise at the real rate of 5 per cent annually. The real discount rate is 10 per cent. The corporate tax rate is 34 per cent.
What is Water Corp worth today?
The worth of Water Corp = PV of after tax revenues - PV of after tax costs
Since both revenue and cost increase at a constant rate, we can use the constant growth formula to calculate the ...
The solution explains how to determine the present worth today