Kollmorgen Corporation, a diversified technology company, reported sales of \($194.9\) million in 1992, and had a net loss of \($1.9\) million in that year. Its net income had traced a fairly volatile course over the previous five years:

The stock had a beta of 1.20, and the normalized net income was expected to increase 6% a year until 1996, after which the growth rate was expected to stabilize at 5% a year (the beta will drop to 1.00). The depreciation amounted to \($8\) million in 1992, and capital spending amounted to \($10\) million in that year. Both items were expected to grow 5% a year in the long term. The firm expected to maintain a debt ratio of 35%. (The Treasury bond rate was 7%, and the risk premium is 5.5%.)

a. Assuming that the average earnings from 1987 to 1992 represents the normalized earnings, estimate the normalized earnings and free cash flow to equity.

b. Estimate the value per share.

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Year Net Income 1987 $ 0.3 million 1988 $11.5 million 1989 -$2.4 million 1990 $7.2 million 1991 $4.6 million