The following is a four-year forecast for Torino Marine.

a. Estimate the fair market value of Torino Marine at the end of 2021. Assume that after 2025, earnings before interest and tax will remain constant at $200 million, depreciation will equal capital expenditures in each year, and working capital will not change. Torino Marine’s weighted average cost of capital is 11 percent and its tax rate is 40 percent.

b. Estimate the fair market value per share of Torino Marine’s equity at the end of 2021 if the company has 40 million shares outstanding and the market value of its interest-bearing liabilities on the valuation date equals $250 million.

c. Now let’s try a different terminal value. Estimate the fair market value of Torino Marine’s equity per share at the end of 2021 under the following assumptions:

i. Free cash flows in years 2022 through 2025 remain as above.

ii. EBIT in year 2025 is $200 million, and then grows at 5 percent per year forever.

iii. To support the perpetual growth in EBIT, capital expenditures in year 2026 exceed depreciation by $30 million, and this difference grows 5 percent per year forever.

iv. Similarly, working capital investments are $15 million in 2026, and this amount grows 5 percent per year forever.

d. Lastly, let’s try a third terminal value. Estimate the fair market value of Torino Marine’s equity per share at the end of 2021 under the following assumptions:

i. Free cash flows in years 2022 through 2025 remain as above. EBIT in year 2025 will be $200 million.

ii. At year-end 2025, Torino Marine has reached maturity, and its equity sells for a “typical” multiple of year 2025 net income. Use 12 as a typical multiple.

iii. At year-end 2025, Torino Marine has $250 million of interest bearing liabilities outstanding at an average interest rate of 10 percent.

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Year Free cash flow ($ millions) 2022 -52 2023 76 2024 92 2025 112