Chapter_04web

Chapter_04web - EXERCISES FOR CHAPTER 4 With Solutions...

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EXERCISES FOR CHAPTER 4 With Solutions Exercise 1. An analyst makes the following forecasts of cash flows for a firm with \$2.5 billion of debt at the end of 2003 (in millions of dollars): 2004 2005 2006 Cash from operations 1,439 1,726 1,894 Cash investments 539 624 834 He forecasts that free cash flows will grow at 4% per year after 2006. Using a required return for operations of 10%, value each of the firms 2,453 million outstanding shares. (Refer to pp. 112 –114) Solution To estimate the value of the firm, calculate free cash flows from the forecasts, take their present value at the end of 2003, and then add the present value of the continuing value with a 4% growth rate. Then subtract the value of the debt to get the value of the equity. 2003 2004 2005 2006 Cash from operations 1,439 1,726 1,894 Cash investments 539 624 834 Free cash flow 900 1,102 1,060 Discount rate 1.10 1.21 1.331 PV of FCF 818.2 910.7 796.4 Total PV to 2006 2,525.3 Continuing value * 18,373.3 PV of continuing value

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This note was uploaded on 10/07/2010 for the course ECTCS ec12947322 taught by Professor Johnathayeri during the Spring '10 term at Life.

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Chapter_04web - EXERCISES FOR CHAPTER 4 With Solutions...

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