Consider the calculation of the continuation value. Suppose Firm C has a WACC of 7%. Firm C's investment banker prepares a DCF valuation of Firm C using the WACC ap- proach. In her DCF valuation, Firm C's investment banker suggests to use a Firm-Value- to-Noplat multiple of 20 to calculate the continuation value after the explicit forecast pe- riod. That is, she suggests that instead of using a formula, one should just multiply Noplat in the year after the explicit forecast period (that is, Noplat in year T+1) by 20 to arrive at the continuation value. Assume that year T+1 is 2029.

Reasonable estimates of Firm C's return on invested capital on new investment (ROIC) for the long-term appropriate for the calculation of the continuation value are be- tween 7% and 9%. Reasonable estimates of the reinvestment rate for Firm C for the long- term appropriate for the calculation of the continuation value range from 25% to 45%. 

Do you think that under these assumptions the Firm-Value-to-Noplat multiple of 20 is reason- able for the continuation value?

 Why or why not? Explain your reasoning carefully and  your calculations.

 Now suppose that Firm C is projected to have $120 million in Noplat and interest expense of $30 million in 2029 (year T+1). It is forecast to have $470 million in debt in 2028 and 2029. Firm C has 85 million shares outstanding and this number will remain constant. The marginal corporate tax rate is 20%. The investment banker agrees that a rea- sonable range of PE (price-earnings) ratios for Firm C in 2028 and 2029 is between 15 and 18. The assumptions on the reinvestment rate and return on invested capital.

Do you think that under these assumptions the Firm-Value-to-No- plat multiple of 20 is reasonable for the continuation value? Why or why not? Explain your reasoning carefully and your calculations.

Answer rating: 100% (QA)

Based on the given information the FirmValuetoNoplat multiple of 20 for the continuation value may not be reasonable To calculate the continuation val... View the full answer