Gemco Jewelers earned $5 million in aftertax operating income in the most recent year. The firm also had capital expenditures of $4 million and depreciation of $2 million during the year, and the noncash working capital at the end of the year was $10 million.
a. Assuming that the firm’s operating income will grow 20% next year, and that all other items (capital expenditures, depreciation, and noncash working capital) will grow at the same rate, estimate the FCFF next year.
b. If the firm can grow at 20% for the next five years, estimate the present value of the FCFF over that period. You can assume a cost of capital of 12%.
c. After year five, the firm’s capital expenditures will decline to 125% of revenues, and the growth rate will drop to 5% (in both operating income and noncash working capital). In addition, the cost of capital will decline to 10%. Estimate the terminal value of the firm at the end of year five.
d. Estimate the current value of the operating assets of the firm.