- A firm has the following three projections of revenueestimates:
Current        Year1            Year2           Year3
       Revenue       $1,500                 $1,650          $1,815          $2,000
       EAT        $95               $106             $117             $130
  The company also receivesa royalty net after taxes of $10 million per year. It is expectedthat the cash flows equal to depreciation will have to bereinvested to keep the firm operating. Further, capitalexpenditures equal to 60 per cent of the net cash flow will need tobe invested to keep the firm growing. Other items on the balancesheet remain unchanged. The CFO believes that it will just forecastfor the first three years and then simply assume a 6 percent annualgrowth rate after the third year.
T-bills yield 8 percent and the marketreturn is 13 percent. The company’s beta using Hamada equation is1.2. What is the value of the company or what would you pay for thefirm if you were interested in it.
