You have been asked to value a Genius Media, a high growth technology firm, and have been able to estimate the expected revenues, EBIT and reinvestment (includes net cap ex and working capital changes) for the next 3 years (in millions):

	y1	y2	y3
Revenues	600	900	1,000
EBIT	-100	100	150
Reinvestment	$ 100	$ 150	$ 50

a. Assuming that the firm currently has a NOL (Net Operating Loss Carried forward) of $ 50 million and that it faces a marginal tax rate of 40%, estimate the free cash flows to the firm each year for the next 3 years. (2 points)

b. The firm is all equity funded and is expected to have a cost of capital of 15% in year 1, 12% in year 2 and 10% thereafter (forever). Estimate the present value of the expected cash flows for the next 3 years. (1 point)

c. The firm is expected to be in stable growth after year 3, growing 3% a year thereafter. Assume that the book value of capital invested in the firm right now is $ 472.50 million and that the return on capital in year 4 (based on your after-tax operating income in year 4 and capital invested at the start of that year) will be sustainable forever after year 3. Estimate the terminal value of the firm (at the end of year 3). (3 points)

d. Genius Media has a cash balance of $ 80 million and also owns 10% of an entertainment software firm. This 10% holding is recorded at its book value of $ 40 million and the average price to book ratio of entertainment software firms is 2.5.

Finally, a competitor has sued Genius Media, claiming patent infringement; there is a 25% probability that Genius Media will lose the lawsuit, in which case it will have to pay out $ 100 million in damages. Estimate the value of equity in the firm today.v

Answer rating: 100% (QA)

a Particulars Net profitloss Tax 40 EBIT Cash Flow from ... View the full answer