Question
An analyst makes the following forecasts of cash flows for a firm with $2.5 billion of debt at the end of 2003 (in millions of
An analyst makes the following forecasts of cash flows for a firm with $2.5 billion of debt at the end of 2003 (in millions of dollars):
2004 | 2005 | 2006 | |
Cash from operations | 1,439 | 1,726 | 1,994 |
Cash investments | 539 | 624 | 734 |
He forecasts that free cash flows will grow at 3% per year after 2006.
A. Using a required return for operations of 12%, value each of the firm's 253 million outstanding shares.
B. Suppose that the market value of equity per share is 20% higher than the value you calculated in part A. Assuming that the market uses the same model and agrees with the forecasted free cash flows above, what growth rate instead of 3% can justify this market price of stocks?
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