Estimate the continuation value using the? market

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Your firm would like to evaluate a proposed new operating division. You have forecasted cash flows for this division for the next five? years, and have estimated that the cost of capital is 12%. You would like to estimate a continuation value. You have made the following forecasts for the last year of your? five-year forecasting horizon? (in millions of? dollars):

Year 5

Revenues $184.4

Operating income 51.1

Net income     33.2

Free cash flows 92.8

Book value of equity 272.3

?Note: Assume that all firms? (including yours) have no debt.

a. You forecast that future free cash flows after year 5 will grow at 3 % per? year, forever. Estimate the continuation value in year? 5, using the perpetuity with growth formula.

b. You have identified several firms in the same industry as your operating division. The average? P/E ratio for these firms is 27

Estimate the continuation value assuming the? P/E ratio for your division in year 5 will be the same as the average? P/E ratio for the comparable firms today.

c. The average? market/book ratio for the comparable firms is 2.4 Estimate the continuation value using the? market/book ratio.

Reference no: EM131660519

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