EDIT 2: Found out how to add pictures, thanks! EDIT: Simply asked: When evaluating stocks using the DCF model, why do some factors that influence the growth rate (ROE change due to competition f.e.) after year n, send the EPS growth rate into a 'transition' for year n+1, becoming stable in n+2, and other factors that influence the growth rate after year n (change in plowback ratio f.e.) do not send the EPS growth rate into a transition, while making a stable growth rate in n+2?

Hi guys! Having some problems with multi stage stock valuation. I don't understand why we take free cash flow of period 8 as horizon value. (http://www.chegg.com/homework-help/Principles-of-Corporate-Finance-11th-edition-chapter-4-problem-26PS-solution-9780078034763?access_code=0c56de5e-caf2-40db-a322-8417e1ce8003 ) As far as I understood there has to be some 'transition' in growth rate at year 8, before it becomes a truly stable growth rate in year 9. Could you give me some other examples of when such a transition growth rate occurs, and when it does not occur? F.e. if competition drives down ROE after year n, EPS growth rate is in transition in year n+1, while if we only change the payout ratio after year n, the EPS growth rate does not go into a transition at all and becomes stable in year n+2. (see difference https://www.chegg.com/homework-help/Principles-of-Corporate-Finance-11th-edition-chapter-4-problem-20PS-solution-9780078034763 and https://www.chegg.com/homework-help/Principles-of-Corporate-Finance-11th-edition-chapter-4-problem-24PS-solution-9780078034763). Also why do we discount also for 2017 earnings if after 2016 already a stable growth rate for revenues and expenses can be calculated? (https://www.chegg.com/homework-help/Principles-of-Corporate-Finance-11th-edition-chapter-4-problem-25PS-solution-9780078034763) Basically, why do some factors influencing growth rate after year n send the EPS growth rate into a transition for year n+1 and other factors not? Thanks a lot.

Construct a new version of Table 4.7, assuming that competition drives down profitability (on existing assets as well as new investment) to 11.5% in year 6, 11% in year 7, 10.5% in year 8, and 8% in year 9 and all later years. What is the value of the concatenator business? Refer to Table 4.7 10.00 11.20 12.54 14.05 15.31 16.69 18.19 19.29 Asset value 2.31 1.20 1.69 2.18 Earnings 2.00 1.34 1.51 1.84 1.20 1.09 Net investment 1.34 1.51 1.26 1.38 1.16 1.50 1.09 0.00 0.00 0.42 0.46 0.50 Free cash flow (FCF) 0.00 1.16 Return on equity (ROE) 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.09 Asset growth rate 0.12 0.09 0.09 0.06 0.12 0.12 0.12 Earnings growth rate 0.09 0.09 0.09 0.06 D TABLE 4.7 Forecasts of free cash flow in millions for the concatenator division, with inpu boldface type. Free cash flow is zero for periods 1 to 3 because investment absorbs all of net inc flow turns positive when growth slows down after period 3. Construct a new version of Table 4.7, assuming that competition drives down profitability (on existing assets as well as new investment) to 11.5% in year 6, 11% in year 7, 10.5% in year 8, and 8% in year 9 and all later years. What is the value of the concatenator business? Refer to Table 4.7 10.00 11.20 12.54 14.05 15.31 16.69 18.19 19.29 Asset value 2.31 1.20 1.69 2.18 Earnings 2.00 1.34 1.51 1.84 1.20 1.09 Net investment 1.34 1.51 1.26 1.38 1.16 1.50 1.09 0.00 0.00 0.42 0.46 0.50 Free cash flow (FCF) 0.00 1.16 Return on equity (ROE) 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.09 Asset growth rate 0.12 0.09 0.09 0.06 0.12 0.12 0.12 Earnings growth rate 0.09 0.09 0.09 0.06 D TABLE 4.7 Forecasts of free cash flow in millions for the concatenator division, with inpu boldface type. Free cash flow is zero for periods 1 to 3 because investment absorbs all of net inc flow turns positive when growth slows down after period 3