Consider the calculation of the continuation value (CV). Suppose FCFT+1 is $100 million regardless of the expected permanent growth rate of free cash flows. The WACC is 7%. How large is the increase in the continuation value if the expected permanent growth rate of free cash flows is increased from 2% to 4%? Show your calculations. (b) (8) Consider the value driver formula. Assume that NoplatT+1 is $125 million, the WACC is 7%, and the expected permanent return on invested capital for new projects is 10%. 

How large is the increase in the continuation value if the expected permanent growth rate of Noplat is increased from 2% to 4%?

Explain why the increase in the continuation value generated by an increase in the expected permanent growth rate from 2% to 4% is higher or lower?

 What is the economic intuition for your result? Explain your reasoning carefully. Calculations or formulas are not enough. 

 It has been argued that forecasting free cash flows explicitly for more than ten years is typically not optimal, since one lacks precise enough information to make good forecasts after ten years. Hence, one obtains a more accurate valuation by applying the continuation value formula at the latest after ten years rather than, for example, after 20 years. Do you agree with this statement and its reasoning? Why or why not? Explain your reasoning carefully. No calculations are needed here.  

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a The calculation of the continuation value CV is given by the formula CV FCFT1 WACC g where FCFT1 is the free cash flow to the firm expected in the n... View the full answer