Question: 1. You have been asked to examine a valuation done of Bafra Corp., a construction company. You have been provided with the income statement for

1.You have been asked to examine a valuation done of Bafra Corp., a construction company. You have been provided with the income statement for the last year:

Revenues $850m

-Operating expenses $570m

-Depreciation and Amortization $130m

EBIT $150m

In the valuation, the analyst has assumed a growth rate of 10% forever in revenues, operating income, and depreciation, and assumed capital expenditures of 120 million for the next year. In addition, the analyst has assumed that non-cash working capital will be 20% of the change in revenues.

a.Estimate the expected free cash flows to the firm for the next year, based on the assumptions made above.

b.What is the return on capital being assumed in perpetuity by the analyst?

c.You believe that the firm is in a competitive business and will earn a return on capital equal to its cost of capital, which is 16%. What is the correct value of the firm assuming that the stable growth rate of 10% does not change?

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