ADVANCED:

You are valuing a firm with a "pro forma" (i.e., with your forward projection of what the cash flows will be). The firm had cash flows of $1,000,000 today, and is growing by a rate of 20% per annum this year.

That is, in year 1, it will have a cash flow of $1.2 million. In each of the following years, the difference between the growth rate and the inflation rate of 2% (forever) halves.

Thus, from year 1 to year 2, the growth rate is 20%, then 2% + (20% - 2%)/2 = 11%, then 2% + (11% - 2%)/2 = 6.5%, and so on.

Assume that the appropriate discount rate for a firm of this riskiness is 12%. (It applies to the $1.2 million cash flow.)

What do you believe the value of this firm to be?

(Hint: It is common in pro formas to project forward for a given number of years, say, 5-10 years, and then to assume that the firm will be sold for a terminal value, assuming that it has steady growth.)