You have been given information on the cash flows for the next three years for AMG inc., a conglomerate. After growing at 10% a year for the next 3 years, the operating income is expected to grow 2.5% a year forever, after year 3. AMG will continue to generate the same return on capital it earned in the first 3 years in perpetuity. Estimate the terminal value at the end of year 3, if the cost of capital is 7.5%. Year 1: EBIT (1-t) = $100 Reinvestment = $80 FCFF = $20 Year 2: EBIT (1-t) = $110 Reinvestment = $88 FCFF = $22 Year 3: EBIT (1-t) = $121 Reinvestment = $96.80 FCFF = $24.20 Choices: A. $496.10 B. $1240.25 C. $1654.49 D. $1984.40 E. $2480.50

You have been given information on the cash flows for the next three years for AMG inc., a conglomerate. After growing at 10% a year for the next 3 years, the operating income is expected to grow 2.5% a year forever, after year 3. AMG will continue to generate the same return on capital it earned in the first 3 years in perpetuity. Estimate the terminal value at the end of year 3, if the cost of capital is 7.5%. Year 1: EBIT (1-t) = $100 Reinvestment = $80 FCFF = $20 Year 2: EBIT (1-t) = $110 Reinvestment = $88 FCFF = $22 Year 3: EBIT (1-t) = $121 Reinvestment = $96.80 FCFF = $24.20 Choices: A. $496.10 B. $1240.25 C. $1654.49 D. $1984.40 E. $2480.50

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 9P

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Question

Year 1:

EBIT (1-t) = $100

Reinvestment = $80

FCFF = $20

Year 2:

EBIT (1-t) = $110

Reinvestment = $88

FCFF = $22

Year 3:

EBIT (1-t) = $121

Reinvestment = $96.80

FCFF = $24.20

Choices:

A. $496.10

B. $1240.25

C. $1654.49

D. $1984.40

E. $2480.50

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