Consider the calculation of the continuation value. Suppose Firm C has a WACC of 6%. Firm C's investment banker prepares a DCF valuation of Firm C using the WACC approach. In her DCF valuation, Firm C's investment banker suggests to use a Firm-Valueto-Noplat multiple of 28 to calculate the continuation value after the explicit forecast period. That is, she suggests that instead of using a formula, one should just multiply Noplat in the year after the explicit forecast period (that is, Noplat in year T+1) by 28 to arrive at the continuation value. Assume that year T+1 is 2029.

1)Reasonable estimates of Firm C's return on invested capital on new investment (ROIC) for the long-term appropriate for the calculation of the continuation value are between 6% and 8%. Reasonable estimates of the reinvestment rate for Firm C for the longterm appropriate for the calculation of the continuation value range from 30% to 50%. Do you think that under these assumptions the Firm-Value-to-Noplat multiple of 28 is reasonable for the continuation value? Why or why not? Explain your reasoning carefully and show your calculations.

2)Now suppose that Firm C is projected to have $140 million in Noplat and interest expense of $20 million in 2029 (year T+1). It is forecast to have $520 million in debt in 2028 and 2029. Firm C has 90 million shares outstanding and this number will remain constant. The marginal corporate tax rate is 15%. The investment banker agrees that a reasonable range of PE (price-earnings) ratios for Firm C in 2028 and 2029 is between 20 and 25. The assumptions on the reinvestment rate and return on invested capital from Question 3(a) do not apply here. Do you think that under these assumptions the Firm-Value-to-Noplat multiple of 28 is reasonable for the continuation value? Why or why not? Explain your reasoning carefully and show your calculations