Problem - 24 points total 8. VALCO Inc. is a publicly traded company and you have been provided the following information on its expected revenues and after-tax operating income (in $ millions), each year for the next 5 years: Last year Expected growth rate Revenues EBIT(1-t) 1 8.00% $1,080.00 $129.60 2 8.00% $1,166.40 $139.97 3 8.00% $1,259.71 $151.17 4 5 8.00% 8.00% $1,360.49 $1,469.33 $163.26 $176.32 $1,000.00 $120.00 Shares outstanding Current price Book value equity Debt outstanding Cash WACC 150 mil $10/share $500 mil $400 mil (book and market value) $300 mil 12% (next 5 years) 8% (year 6 and beyond) a. (10 points) Assuming that the firm's return on invested capital stays at its current level for the next 5 years, estimate the reinvestment and free cash flow to the firm each year for the next five years. a. (10 points) Assuming that the firm's return on invested capital stays at its current level for the next 5 years, estimate the reinvestment and free cash flow to the firm each year for the next five years. Revenues EBIT(1-t) Reinvestment 1 $1,080.00 $129.60 2 $1,166.40 $139.97 3 $1,259.71 $151.17 4 5 $1,360.49 $1,469.33 $163.26 $176.32 FCFF b. (5 points) After year 5, you expect the firm's return on invested capital to halve (from current levels) and the expected growth rate to drop to 2% a year in perpetuity. Estimate the terminal value at the end of year 5. C. (5 points) Estimate the value of equity per share today d. (4 points) is the firm's current stock price undervalued or overvalued? Why? Problem - 24 points total 8. VALCO Inc. is a publicly traded company and you have been provided the following information on its expected revenues and after-tax operating income (in $ millions), each year for the next 5 years: Last year Expected growth rate Revenues EBIT(1-t) 1 8.00% $1,080.00 $129.60 2 8.00% $1,166.40 $139.97 3 8.00% $1,259.71 $151.17 4 5 8.00% 8.00% $1,360.49 $1,469.33 $163.26 $176.32 $1,000.00 $120.00 Shares outstanding Current price Book value equity Debt outstanding Cash WACC 150 mil $10/share $500 mil $400 mil (book and market value) $300 mil 12% (next 5 years) 8% (year 6 and beyond) a. (10 points) Assuming that the firm's return on invested capital stays at its current level for the next 5 years, estimate the reinvestment and free cash flow to the firm each year for the next five years. a. (10 points) Assuming that the firm's return on invested capital stays at its current level for the next 5 years, estimate the reinvestment and free cash flow to the firm each year for the next five years. Revenues EBIT(1-t) Reinvestment 1 $1,080.00 $129.60 2 $1,166.40 $139.97 3 $1,259.71 $151.17 4 5 $1,360.49 $1,469.33 $163.26 $176.32 FCFF b. (5 points) After year 5, you expect the firm's return on invested capital to halve (from current levels) and the expected growth rate to drop to 2% a year in perpetuity. Estimate the terminal value at the end of year 5. C. (5 points) Estimate the value of equity per share today d. (4 points) is the firm's current stock price undervalued or overvalued? Why