Question: Over the next three years, a firm is expected to earn an economic profit of $100,000 in the first year, $200,000 in the second year,

Over the next three years, a firm is expected to earn an economic profit of $100,000 in the first year, $200,000 in the second year, and $300,000 in the third year. Let us assume that after the end of the third year, it is known that the firm will stop its business, so no economic profits can be expected after then.

a. If the risk-adjusted discount rate is 5 percent for each of the next three years what is the current value of the firm? Aa result, if the capital of the firm is divided into 1,000 shares on the stock exchange market, what is the maximum price that an investor should be paying for one share? b. If the risk-adjusted discount rate is 2 percent for each of the next three years, how do your answers change? And if an independent report predicts an increase of profits to $500,000 in year 3, because of the discovery of a new technological process, what will happen to the value of each single share of the company? Will it increase or decrease? By how much?

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