Given the forecast below, estimate the fair market value of Kenmore Air's equity per share at the
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Question:
Given the forecast below, estimate the fair market value of Kenmore Air's equity per share at the end of 2017 under the following assumptions:
- EBIT in year 2021 will be $210 million.
- At year-end 2021, Kenmore Air has reached maturity, and analysts expect its equity will sell for 15 times year 2021 net income.
- At year-end 2021, Kenmore Air has $300 million book value of interest-bearing liabilities outstanding at an average interest rate of 10%.
- Kenmore Air's weighted-average cost of capital is 11%, and its tax rate is 40%.
- Kenmore Air has 50 million shares outstanding, and the market value of its interest-bearing liabilities on the valuation date equals $300 million.
| Forecast for Kenmore Air, Incorporated | ||||
|---|---|---|---|---|
| Year | 2018 | 2019 | 2020 | 2021 |
| Free cash flow ($ millions) | 40 | 85 | 97 | 112 |
Expert Answer:
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