be 2%, but the cost of equity will remain the same. Given this information, what is the equity value of the operating cash flows?3. The Kentucky Headhunter Bourbon Company has an operating income (EBIT) of $250 with a marginal tax rate of 30%. The net CAPEX was $50 with a $25 change in working capital. Over the next 5 years, theyanticipate an average reinvestment rate of 35% with a return on capital of 22%. During this high-growth period, they estimate a beta of 0.85, a risk-free rate of 3% and risk premium of 4%. Pre-tax debt cost is 5.5%, with a 20% debt ratio. After year 5, the estimated beta will be 1.00, with the same risk-free rate and market risk premium as in the high-growth period. The stable pre-tax debt cost will be 4.0%, the tax rate will remain at 30% and the stable growth rate will be 3%. The schedule for Net CAPEX over the 5-year high-growth period is: $55, $60, $65, $50, $40. The schedule for Change in Net Working Capital will be: $30, $35, $40, $30, $20. For the stable period, the FCFF can be estimated using the after-tax EBIT lessprojected reinvestment. Based on this information, what is the projected enterprise value for the company?4. The Garcia Photography Studios is trying to estimate their equity multiples based on the following information: High-growth period = 4 years, net income of $45 on sales of $350, with book value of equityof $125. During the high-growth period, the payout ratio will be 10%, and the firm’s beta of 1.10, risk-
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- Fall '16
- Finance, Generally Accepted Accounting Principles, Dividend yield, high-growth period