E15.3. Forecasting Free Cash Flows and Residual Operating Income, and Valuing a Firm (Medium) The following forecasts were prepared in 2008 for a firm with a cost of capital for its oper- ations of 12 percent. Amounts are in millions of dollars. Year 2009E 2010E 2011E 2012E 2013E Dividends 70 75 75 75 75 Net debt 0 0 0 Investment expenditures BQ 89 94 95 95 Common shareholders' equity 635 665 689 703 712 The common stockholders' equity at the beginning of 2009 is 596 and there is no net debt.

a. Forecast cash flow from operations and free cash flow for each of the five years.

b. Use residual operating income techniques to value this firm.

c. Attempt to value the firm using discounted cash flow analysis. Do you get the same answer as that for part

(b) of the exercise?