2. A firm has the following three projections of revenue estimates: Current Year1 Year 2 Year 3 Revenue...

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2. A firm has the following three projections of revenueestimates:
Current Year1 Year 2 Year 3
Revenue $1,500 $1,650 $1,815 $2,000
EAT $95 $106 $117 $130
The company also receives a royalty net after taxes of $10million per year. It is expected that the cash flows equal todepreciation will have to be reinvested to keep the firm operating.Further, capital expenditures equal to 60 percent of the net cashflow will need to be invested to keep the firm growing. Other itemson the balance sheet remain unchanged. The CFO believes that itwill just forecast for the first three years and then simply assumea 6 percent annual growth rate after the third year.
T-bills yield 8 percent and the market return is 13 percent. Thecompany’s beta using Hamada equation is 1.2. What is the value ofthe company or what would you pay for the firm if you wereinterested in it.

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Free cash flow to the firm EAT Royalty Depreciation maintenance See Answer

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2. A firm has the following three projections of revenueestimates:Current Year1 Year 2 Year 3Revenue $1,500 $1,650 $1,815 $2,000EAT $95 $106 $117 $130The company also receives a royalty net after taxes of $10million per year. It is expected that the cash flows equal todepreciation will have to be reinvested to keep the firm operating.Further, capital expenditures equal to 60 percent of the net cashflow will need to be invested to keep the firm growing. Other itemson the balance sheet remain unchanged. The CFO believes that itwill just forecast for the first three years and then simply assumea 6 percent annual growth rate after the third year.T-bills yield 8 percent and the market return is 13 percent. Thecompany’s beta using Hamada equation is 1.2. What is the value ofthe company or what would you pay for the firm if you wereinterested in it.