Peruvian company, DMB LLC

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, prot = revenue − cost. Hint:
Apply the Gordon Formula to the prots of the rm.
a) If the prot is not expected to be constant, the present value of all the company's future prots
is $125 million.
b) If the prot is expected to grow 3% annually, the present value of all the company's future prots
is $20 million.
c) If the prot is expected to grow 4% annually, the present value of all the company's future prots
is $25.75 million.
d) If the prot is expected to grow 6% annually, the present value of all the company's future prots
is $50 million.
e) If the prot is expected to grow 10% annually, the present value of all the company's future
prots is negative.
1.B
Suppose the capital share in New Zealand is α = 3/5. Mark ALL of the CORRECT statements.
For this question, use the growth accounting formula given in class.
a) If capital increases by 5%, labor hours increase by 15%, and total output increases by 10%
relative to last year, then TFP should increase by 1%.
b) If capital increases by 15%, labor hours decrease by 10%, and TFP increases by 5% relative
to last year, then total output should increase by 5%.
c) If capital increases by 10%, TFP increases by 5%, and total output increases by 10% relative to last year, then labor hours should decrease by 1%.
d) If labor hours increase by 5%, TFP increases by 5