Estimated that the firms future cash flows

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An analyst at the Starr Corp. had estimated that the firm's future cash flows for the next five years will equal $80 million per year.

a. If the cost of capital for Starr is 12%, what is the value of Starr Corp.'s planning period cash flows spanning the next five years?

b. It is extremely difficult to estimate cash flows in the distant future, so it is standard practice to lump all the firm's cash flows for years beyond a planning period of, say, five years into something called a terminal value. If companies in Starr's industry are currently selling for five times their annual cash flow, what would you estimate the terminal value of Starr to be in year 5?

c. Apply the same discount rate to the terminal value as to the planning period cash flows, and estimate the enterprise value of Starr today.

Reference no: EM131022485

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