You have been asked to check the valuation of InfoSys, a software firm, done by an eminent analyst. You note that the analyst has assumed earnings growth of 10% a year for the next 3 years, and 5% a year thereafter, and has arrived at a value for the firm of $ 400 million. While you find yourself in agreement with most of the assumptions made by the analyst, you disagree with the assumption she has made that capital expenditures will offset depreciation after year 3. You believe, instead, that capital expenditures will be 150% of depreciation after year 3. If the current depreciation is $10 million and the cost of capital is 11%, estimate the effect of this change in assumption on the value of the firm. (There are no working capital requirements and depreciation grows at the same rate as earnings)

Answer rating: 100% (QA)

To estimate the effect of the change in assumption we need to calculate the free cash flows FCF for ... View the full answer