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Fundamental valuation . Financial analyst is evaluating XS Company by using the FCFF valuation approach. The analyst has collected the following information on its expected
- Fundamental valuation. 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.
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- 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.
No additional information is given.
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