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Question 1

You are trying to value Dexter Co, a data processing company. The company
generated $ 1 billion in revenues in the most recent financial year and
expects
revenues to grow 3% a year in perpetuity. It generated $ 30 million in aftertax
operating income in the most recent financial year and expects after-tax
operating
margin to double over the next 3 years (in equal annual increments). After
year 3,
the margin will stabilize at year 3 levels forever. The firm is expected to have
depreciation of $ 20 million and capital expenditures of $15 million each year
for
the next 3 years and to earn a 10% return on capital in perpetuity after that.
There
are no working capital requirements. The cost of capital will be 12%.
a. Estimate the free cash flows to the firm each year for the next 3 years
b. Estimate the value of the firm at the end of the third year (terminal value)
c. Estimate the value of equity per share today, if the firm has $ 150 million
in debt outstanding, $ 25 million as a cash balance and 10 million shares.

Question 2
You have been asked to review a discounted cashflow valuation done by
another
analyst of Proteus Inc., a small manufacturing company. The analysts
estimates of aftertax operating income and free cashflows to the firm for the
next 4 years are provided below:
Year
1
2
3
4
EBIT(1-t)
$100.00
$115.00
$132.25
$152.09
FCFF
$25.00
$28.75
$33.06
$38.02
a. Given the growth rate projected by the analyst and the FCFF numbers,
estimate the
return on capital that the analyst is assuming for the firm over the next 4
years. (You can assume that the return on capital will remain unchanged for
the next 4 years)
b. Assuming that the return on capital remains unchanged (from current
levels) in
perpetuity, that the cost of capital is 12% and that the expected growth rate
is 4% forever after year 4, estimate the value at the end of the fourth year.
c. Estimate the value per share today if Lichen Inc. has $ 150 million in debt,
$ 100
million as a cash balance and 50 million shares outstanding.

Question 3
You are trying to assess whether it makes sense for Tempest Inc., a consumer
product
manufacturer to divest itself of some of its businesses. The firm has book
capital of $
2 billion, on which it generated after-tax operating income of $160 million in
the
most recent year. The firm is considering divesting itself of its appliance
business,
which accounted for about half the total book capital of the firm, while
generating
only 40% of the firms overall aftter-tax operating income. The cost of capital
for all
parts of the firm is 10% and the expected growth rate in perpetuity is 4%.
The firm
has $250 million in debt, $ 100 million in cash and 100 million shares
outstanding.
a. Estimate the value of equity per share before the divestiture,
b. Assume now that the firm divests itself of the small appliance business for
book
value and keeps the proceeds as cash. Estimate the value per share after the
divestiture.