Kollmorgen Corporation, a diversified technology company, reported sales of $194.9 million in 1992, and had a net loss of $1.9 million in that year. Its net income had traced a fairly volatile course over the previous five years.

Year	Net Income ($ million)
1987	0.3
1988	11.5
1989	-2.4
1990	7.2
1991	-4.6
1992	-1.9

The stock had a beta of 1.20, and the normalized net income was expected to increase 6% a year until 1996, after which the growth rate was expected to stabilize at 5% a year (the beta will drop to 1.00). The depreciation amounted to $8 million in 1992, and capital spending amounted to $10 million in that year. Both items were expected to grow 5% a year in the long term. The firm expected to maintain a debt ratio of 35%. (The Treasury bond rate was 7%, and the risk premium is 5.5%.)

a. Assuming that the average earnings from 1987 to 1992 represents the normalized earnings, estimate the normalized earnings and free cash flow to equity.

b. Estimate the equity value. 

Answer rating: 100% (QA)

a To estimate the normalized earnings and free cash flow to equity we can use the following steps Ca... View the full answer