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Constant Growth, Constant Investing (cont)

Can we price this firm a different way?  

Since the investment grows at a constant rate we can immediately estimate g

Investment rate x ROI = 0.6 × 20% = 12%

Then estimate PV(GO) as a growing perpetuity based on dividends rather than cash flow

D1 / (rE - g) = $4 / (0.16 - 0.12) = $100

So the entire firm is worth $100

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