Bay Properties is considering starting a commercial real estate division. It has prepared the following? four-year...

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Bay Properties is considering starting a commercial real estatedivision. It has prepared the following? four-year forecast of freecash flows for this? division:
year 1 year 2 year 3 year 4
Free Cash Flow -132,000 15,000 85,000 239,000
Assume cash flows after year 4 will grow at 5 % per? year,forever. If the cost of capital for this division is 8 %?,
a. what is the continuation value in year 4 for cashflows after year? 4?
b. What is the value today of this?division?
Please answer both questions and show allwork!

Answer & Explanation Solved by verified expert

3.7 Ratings (545 Votes)

aThe continuation value in year 4 for cash flows after year 4 Free Cash Flow in Year 4 FCF4 239000 Growth Rate g 500 per year Required Rate of Return Ke 800 Therefore the See Answer

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Bay Properties is considering starting a commercial real estatedivision. It has prepared the following? four-year forecast of freecash flows for this? division:year 1year 2year 3year 4Free Cash Flow-132,00015,00085,000239,000Assume cash flows after year 4 will grow at 5 % per? year,forever. If the cost of capital for this division is 8 %?,a. what is the continuation value in year 4 for cashflows after year? 4?b. What is the value today of this?division?Please answer both questions and show allwork!

	year 1	year 2	year 3	year 4
Free Cash Flow	-132,000	15,000	85,000	239,000