Tenet Telecommunications is in serious financial trouble and has just reported an operating loss of \($500\) million on revenues of \($5\) billion. The firm also had capital expenditures of \($1.8\) billion and depreciation of

\($800\) million in the most recent financial year, and no significant noncash working capital requirements. You assume that:

Revenues will continue to grow 10% a year for the next five years and 5% in perpetuity after that. EBITDA as a percent of sales will increase in linear increments from existing levels to 20% of revenues in year 5.

Capital expenditures can be cut to \($600\) million each year for the next five years, while depreciation will remain at \($800\) million each year.

The net operating loss carried forward is \($700\) million.

Return on capital in perpetuity after year 5 will be 10%.

Cost of capital for the firm is 9% in perpetuity.

a. Estimate the EBITDA, EBIT, and after-tax EBIT for the firm each year for the next five years, assuming a corporate tax rate of 40%.

b. Estimate the FCFF each year for the next five years.

c. Estimate the terminal value of the firm.

d. Estimate the value of the firm today.

e. How would your valuation change if you were told that there is a 20% chance that the firm will go bankrupt and that assets will have a distress sale value amounting to 60% of the current book value of \($1.25\) billion?