Duvall and his team are comfortable with the normalized earnings, growth, and discount rate estimated for Able. Detailed projections for Able are not developed by management. Suppose that free cash flow to the firm is expected to grow at 3 percent per year going forward from the level of $9,358,800 forecast in Example 2.

i. Explain the rationale for the use of the capitalized cash flow method in this case.

ii. Calculate the value of the equity of Able using the capitalized cash flow method and a WACC of 13.1 percent based on Able’s optimal capital structure.

iii. Calculate the value of the equity of Able using the WACC of 13.8 percent based on the existing capital structure.

iv. Discuss factors leading to the difference in the computed values.