Following is a free cash flow forecast for Egons Paranormal Investigations Corporation. Use this information for problems following.

($ millions) 2002 2003 2004 2005

NOPAT 20.0 22.0 25.0 28.0

Free cash flow (2.0) 15.0 10.0 20.0

1.You expect NOPAT to grow at 3% per year and for free cash flow to be equal to NOPAT, beginning in 2006. The book value of Egons core operations at December 31, 2001 is $100 million and its weighted-average cost of capital is 9%.

a.Forecast Egons book value of core operations for 20022006. b.Forecast Egons residual income for 20022006. c.Calculate the value of Egons core operations as of December 31, 2001, using the residual income method.

2.Confirm your answer to problem 1(c) by taking the present value of Egons forecasted free cash flows.3.Redo problem 1 assuming the book value of Egons core operations at December 31, 2001 is only $80 million.