Practice_Problems_7_Stock_Valuation - FIN340 PRACTICE...

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1 FIN340 PRACTICE PROBLEM SET 7 STOCK VALUATION 1. After graduation, you become an analyst for a boutique investment banking company specializing in the technology industry. For your first assignment, you are on a team that is putting together an acquisition plan for Cisco who wants to acquire a new startup company that makes MP3 players. The more senior member of the group do some analysis and determine that the free cash flow from continuing operations of the startup excluding the depreciation tax shield (or what they call “ residual free cash flow”) is expected to grow at a real rate of 30% for the next 3 years as it become part of Cisco. Then, its growth will slow down to a real rate of 15% for 7 years. After this 10 year period, the firm will stabilize with a real growth rate of 5%. The investment bank’s economist tells you that inflation is expected to be 3%. The nominal cost of capital for the startup is 20%. However, the depreciation tax shield is based on fixed assets already
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Practice_Problems_7_Stock_Valuation - FIN340 PRACTICE...

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