SIMPLE INTEREST AND DISCOUNT

Since the firm expects to earn $750,000 per year in perpetuity and the appropriate discount rate to its unlevered equity holders is 15%, the market value of Strom’s assets is equal to a perpetuity of $750,000 per year, discounted at 15%. Therefore, the market value of Strom’s assets before the buyout is $5,000,000 (= $750,000 / 0.15). ................
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