3. 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$10 million 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 13percent. The company’s beta using Hamada equation is 1.2. What isthe value of the company or what would you pay for the firm if youwere interested in it.
