1.A Assume that a Peruvian company, DMB LLC, just reported its earnings this year. The reported revenue was $10 million and the reported cost was $9 million. The discount rate is 8%. Mark ALL the CORRECT statements. For this question, profit = revenue - cost. Hint: Apply the Gordon Formula to the profits of the firm. a) If the profit is expected to be constant, the present value of all the company's future profits is $125 million. b) If the profit is expected to grow 3% annually, the present value of all the company's future profits is $20 million. c) If the profit is expected to grow 4% annually, the present value of all the company's future profits is $25.75 million. d) If the profit is expected to grow 6% annually, the present value of all the company's future profits is $50 million.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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1.A Assume that a Peruvian company, DMB LLC, just reported its earnings this year. The
reported revenue was $10 million and the reported cost was $9 million. The discount rate is
8%. Mark ALL the CORRECT statements. For this question, profit = revenue - cost. Hint:
Apply the Gordon Formula to the profits of the firm.
a) If the profit is expected to be constant, the present value of all the company's future profits is
$125 million.
b) If the profit is expected to grow 3% annually, the present value of all the company's future profits
is $20 million.
c) If the profit is expected to grow 4% annually, the present value of all the company's future profits
is $25.75 million.
d) If the profit is expected to grow 6% annually, the present value of all the company's future profits
is $50 million.
e) If the profit is expected to grow 10% annually, the present value of all the company's future
profits is negative.
Transcribed Image Text:1.A Assume that a Peruvian company, DMB LLC, just reported its earnings this year. The reported revenue was $10 million and the reported cost was $9 million. The discount rate is 8%. Mark ALL the CORRECT statements. For this question, profit = revenue - cost. Hint: Apply the Gordon Formula to the profits of the firm. a) If the profit is expected to be constant, the present value of all the company's future profits is $125 million. b) If the profit is expected to grow 3% annually, the present value of all the company's future profits is $20 million. c) If the profit is expected to grow 4% annually, the present value of all the company's future profits is $25.75 million. d) If the profit is expected to grow 6% annually, the present value of all the company's future profits is $50 million. e) If the profit is expected to grow 10% annually, the present value of all the company's future profits is negative.
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