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 10%. 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 $292.4 Operating income 94.5 Net income Free cash flows 61.4 92.1 215.7 Book value of equity a. You forecast that future free cash flows after year 5 will grow at 4% 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 21. 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 5.9. Estimate the continuation value using the market/book ratio. Note: Assume that all firms (including yours) have no debt. a. You forecast that future free cash flows after year 5 will grow at 4% per year, forever. Estimate the continuation value in year 5, using the perpetuity with growth formula. The continuation value in year 5 is $ million. (Round to one decimal place.) b. You have identified several firms in the same industry as your operating division. The average P/E ratio for these firms is 21. 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. The continuation value in year 5 is $ million. (Round to one decimal place.) c. The average market/book ratio for the comparable firms is 5.9. Estimate the continuation value using the market/book ratio. The continuation value in year 5 is $ million. (Round to one decimal place.)
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 10%. 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 $292.4 Operating income 94.5 Net income Free cash flows 61.4 92.1 215.7 Book value of equity a. You forecast that future free cash flows after year 5 will grow at 4% 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 21. 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 5.9. Estimate the continuation value using the market/book ratio. Note: Assume that all firms (including yours) have no debt. a. You forecast that future free cash flows after year 5 will grow at 4% per year, forever. Estimate the continuation value in year 5, using the perpetuity with growth formula. The continuation value in year 5 is $ million. (Round to one decimal place.) b. You have identified several firms in the same industry as your operating division. The average P/E ratio for these firms is 21. 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. The continuation value in year 5 is $ million. (Round to one decimal place.) c. The average market/book ratio for the comparable firms is 5.9. Estimate the continuation value using the market/book ratio. The continuation value in year 5 is $ million. (Round to one decimal place.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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 10%. 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
$292.4
94.5
Operating income
Net income
Free cash flows
61.4
92.1
215.7
Book value of equity
a. You forecast that future free cash flows after year 5 will grow at 4% 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 21. 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 5.9. Estimate the continuation value using the market/book ratio.
Note: Assume that all firms (including yours) have no debt.
a. You forecast that future free cash flows after year 5 will grow at 4% per year, forever. Estimate the continuation value in year 5, using the perpetuity with growth formula.
The continuation value in year 5 is $
million. (Round to one decimal place.)
b. You have identified several firms in the same industry as your operating division. The average P/E ratio for these firms is 21. 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.
The continuation value in year 5 is $
million. (Round to one decimal place.)
c. The average market/book ratio for the comparable firms is 5.9. Estimate the continuation value using the market/book ratio.
The continuation value in year 5 is $
million. (Round to one decimal place.)
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