A maker of pet toys, has $40 million in outstanding debt, 3.5 million shares outstanding. Sales for the current year (Year 1) are expected to be $30 million, and are expected to grow at 15% per year for the next four (4) years. After that, sales are expected to grow at 2% per year indefinitely (or forever). EBIT this year will be $10 million. EBIT, depreciation, capital spending, and the change in net working capital will grow at the same rate as sales. The appropriate weighted average cost of capital for the company is 8% and the tax rate is 21%.

 

a) Based on this information, what terminal value would you assign to this firm (in Year 5)?

b) Based on this information, what value would you assign to this firm today?

Answer rating: 100% (QA)

a To calculate the terminal value of the firm in Year 5 we need to determine the cash flow at that point and apply the perpetuity formula Heres how you can do that 1 Calculate the cash flow in Year 5 ... View the full answer