Financial analyst is evaluating XS Company by using the FCFF valuation approach. The analyst has collected the following information on its expected revenues and after-tax operating income (in $ millions), each year for the next 5 years:

The company currently has 250 million shares trading at $10/share (book value of equity=$1 000 million). The company also had $800 million in debt outstanding (both book and market value) and $500 million in non-core financial investments and cash. The cost of capital for the firm is expected to be 10% for the next 5 years and drop to 8% thereafter.

Questions:

1. Assuming that the company is going to reinvest 40% of its after-tax operating income in next 5 years, estimate the free cash flow to the firm each year for the next five years
2. After five years the expected growth rate of revenues and after-tax operating income drop to 3% in perpetuity and the company reinvestment rate drops to 30%. Estimate the terminal value of the company at the end of year 5.
3. Estimate the value of the equity per share today.

Expected Growth rate Revenues EBIT (1-t) Last year 1 2 3 4 5 8.00% 8.00% 8.00% 8.00% 8.00% $ 1 000.00 $1 080.00 $1 166.40 $1 259.71 $1 360.49 $1 469.33 $120.00 $129.60 $139.97 $151.17 $163.26 $176.32