ESTIMATE the value of the business as the present value of free cash flows?
Question:
( Yen 100millions)
Years 1 2 3 4 5 6
Assets 24.00 40.00 52.00 60.00 68.00 73.44
Earnings* 4.80 8.00 10.40 10.80 10.88 11.75
Investments 16.00 12.00 8.00 8.00 5.44 5.88
The company will continue a payout ratio of 50% beyond year 6 and earn 16% on the assets. If the weighted average cost of capital is 15%, ESTIMATE the value of the business as the present value of free cash flows ( (*)This is after-tax before-depreciation earnings, and you can neglect the changes in working capital)
Answer:
34.8 (Yen 100millions) is your answer.
Here's a few hints:
-assume annual cash stream = earnings - investments
-required return = wacc
-terminal growth = (ROE)*(Retention Ratio)
-assume all capital is funded by equity
...if you still can't get the problem, you should drop this corporate finance class.
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