7. In the valuation exercise of section 5.4, the terminal value is calculated using a Gordon dividend model on the cash flows. Replace this terminal value by the year 5 book value of debt + equity. This means that you are essentially assuming that the book value correctly predicts the market value.

B D E F G H 20% 5%-real growth 2% + inflation 3%? 0 1 176 2 188 3 201 4 214 A 53 Valuing the firm 54 Weighted average cost of capital 55 Long-term free cash flow growth rate 56 57 Year 58 FCF 59 Terminal value 60 Total 61 62 Enterprise value, present value of row 60 63 Add in initial (year O) cash and mkt. securities 64 Asset value in year 0 65 Subtract out value of firm's debt today 66 Equity value 5 228 1,598C-G58" 1+B55M(B54-B55) 1,826 176 188 201 214 1.231S--ENPV(B54,C60:660) 80-827 1,311B63.362 (320)