firm valuation The value of a firm equals the present value of all its future profits PⅤ=∑π/(1+1) If profits grow at a constant rate, g<i, then ■PV=π(1+1)/(i-g),兀。= current profit level Maximizing short-Term Profits If the growth rate in profits interest rate and both remain constant, maximizing the present value of all future profits is the same as maximizing current profits Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Firm Valuation • The value of a firm equals the present value of all its future profits  PV = S pt / (1 + i)t • If profits grow at a constant rate, g < i, then:  PV = po ( 1+i) / ( i - g), po = current profit level. • Maximizing Short-Term Profits  If the growth rate in profits < interest rate and both remain constant, maximizing the present value of all future profits is the same as maximizing current profits