INTERNATIONAL’s analyst thinks it would be worthwhile valuing IPCO in two parts: the company’s existing business and its investment opportunities. This would facilitate incorporating additional relevant information in the analysis. She would like to start with a valuation of its existing business. She needs to seek more precise information about the company’s products but wants to move ahead in the meantime with the following rough estimates.

The company’s existing cash flow comes almost equally from three products A, B, and C.

The expected remaining lives of the three products are two, three, and four years, respectively.

The cash flow from each product during its life is roughly one-third of the company’s existing 36.93 annual free cash flow. The analyst thinks that 12% would be the appropriate discount rate for cash flows from existing products.

(a) Calculate the value of the appropriate annuity factor for each of the three products and obtain the resulting total PV of IPCO’s existing products.

(b) What (negative) growth rate in the Gordon–Williams model would give the same value for the existing products?