Question 5 a) Using the following information, estimate the value of Gonzo Musicology Ltd, an e-commerce...

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Question 5 a) Using the following information, estimate the value of Gonzo Musicology Ltd, an e-commerce start-up company: Company and operations set-up costs (total immediate expenditure) $2,000,000; Year one (end) free cash flow $2,200,000; Year two (end) free cash flow $2,500,000. You also estimate that the constant growth rate in free cash flows from year three onward will be 1.5 percent per annum. You intend to sell this start-up company after two years of operation. The required rate of return on similar projects is 10 percent per annum. Required: i) ii) Estimate the terminal value of this business at the end of year two. Estimate the present value of this business given the information provided. b) Explain how private equity has contributed to solving the sorting and incentive problems within investment practices. Question 5 a) Using the following information, estimate the value of Gonzo Musicology Ltd, an e-commerce start-up company: Company and operations set-up costs (total immediate expenditure) $2,000,000; Year one (end) free cash flow $2,200,000; Year two (end) free cash flow $2,500,000. You also estimate that the constant growth rate in free cash flows from year three onward will be 1.5 percent per annum. You intend to sell this start-up company after two years of operation. The required rate of return on similar projects is 10 percent per annum. Required: i) ii) Estimate the terminal value of this business at the end of year two. Estimate the present value of this business given the information provided. b) Explain how private equity has contributed to solving the sorting and incentive problems within investment practices.

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Answer a i To estimate the terminal value ... View the full answer