New information for Gamma Systems Manufacturing Corporation has been brought to management’s attention. Use the financial statement information in Problem 5 and take into consideration that sales will grow at a 15 percent rate in 2020 and at a 10 percent rate in 2021 before settling down to a 6 percent perpetuity growth rate in 2022 and thereafter.

A. Estimate the free cash flows available to equity investors for 2020, 2021, and 2022.

B. Estimate the terminal value of all future equity cash flows at the end of 2021.

C. Estimate the equity value of Gamma Systems at the end of 2019 under these assumptions. 

Gamma Systems Manufacturing Corporation has reached its maturity stage, and its net sales are expected to grow at a 6 percent compound rate for the foreseeable future. Management believes that, as a mature venture, the appropriate equity discount rate for Gamma Systems is 18 percent.

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GAMMA SYSTEMS MANUFACTURING CORPORATION BALANCE SHEETS Cash Accounts receivable Inventories Total current assets Fixed assets, net Total assets Accounts payable Accruals Bank loan Total current liabilities 2018 $ 50,000 200,000 450,000 700,000 400,000 $1,100,000 $ 130,000 50,000 90,000 270,000 2019 $ 40,000 260,000 500,000 800,000 500,000 $1,300,000 $ 170,000 70,000 90,000 330,000