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Your firm would like to evaluate a proposed new operating division. You have forecasted cash flows for this division for the next five years, and have estimated that the cost of capital is 12%

Price:
$15.99
SKU:
703227


Product Description

Your firm would like to evaluate a proposed new operating division. You have forecasted cash flows for this division for the next five​ years, and have estimated that the cost of capital is 12%. You would like to estimate a continuation value. You have made the following forecasts for the last year of your​ five-year forecasting horizon​ (in millions of​ dollars):

Year 5

Revenues $184.4

Operating income 51.1

Net income     33.2

Free cash flows 92.8

Book value of equity 272.3

 

 

​Note: Assume that all firms​ (including yours) have no debt.

 

a. You forecast that future free cash flows after year 5 will grow at 3 % per​ year, forever. Estimate the continuation value in year​ 5, using the perpetuity with growth formula.

 

b. You have identified several firms in the same industry as your operating division. The average​ P/E ratio for these firms is 27

Estimate the continuation value assuming the​ P/E ratio for your division in year 5 will be the same as the average​ P/E ratio for the comparable firms today.

 

c. The average​ market/book ratio for the comparable firms is 2.4 Estimate the continuation value using the​ market/book ratio.


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