Reference no: EM131746834

Q1. Terminal Value plays an important role in enterprise valuation. What factors affect the estimate of Terminal Value? How sensitive enterprise valuation is to Terminal value?

Q2. Imagine two independently owned gas stations standing next to each other and selling gas (and other goods) at about the same price, so they have the same revenues, cost structure and effective tax rate of 35%. Assume that every year they have average EBIT of $ 500,000 (I know, it's quite optimistic) without any anticipated growth. One owner finances all operations out of own pocket, while another in addition to own money also borrows $ 500,000 for five years and refinances this debt every five years without repaying principal during the time of the loan. The principal is repaid at the end by newly borrowed money (the debt is rolled over).

Discuss the difference in value (if any) of these two stations.

Q3. Some people think that stock prices reflect the present value of future dividends. Does this approach make sense? How does the forecasting of growth rate on future cash flows affect this approach of valuation? Are there implications for interpreting P/ E ratios?