Horrigan Corporation; perpetuity growth model derivation of results in Chapter 5. Refer to the discussion on page 274 in Chapter 5. There, in estimating the value of a share of common stock of Horrigan Corporation, we computed the present value of excess cash flows at the end of Year 4 to be $1,336.7 million. This exercise requires you to confirm that computation.

To compute the amount for the years after Year 9, note we assume that the excess cash flows are $204 million at the end of Year 9 and grow at the rate of 12 percent per year thereafter. That means the cash flows for the end of Year 10 are

$228.48 (= 1.12 X $204) million. You can use the perpetuity growth model to verify that the present value at the end of Year 9 of that growing stream of payments is $2,856 million. That is, if a payment (in this case $228.48 million), grows at rate g (in this case, 12 percent) per period forever, the discount rate is r (in this case, 20 percent) per period, and the first payment flows at the end of the first period, then the present value of that stream is $2,856 [= $228.48/(/- - g) = $228.48/(.20 -

.12)] million. Then, we discount that amount to the end of Year 4 to derive $1,147.8 million.

(We do not expect that any firm's excess cash flows could increase forever at 12 percent per year. After a century, such a firm would be larger than the rest of the entire U.S. economy, combined. We use such computations to estimate values. When the discount rate (here 20 percent per year) exceeds the growth rate (here 12 percent per year) by a substantial amount (here by 8 percentage points), the present value of payments far in I'uture, say more than 40 years out, is neglighlc.)

Reproduce the numbers in Column (6) on page 274 using the data from Column

(5) and the appropriate present value computations.

(Appendix)