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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