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Given the forecast below, estimate the fair market value of Kenmore Airs equity per share at the end of 2017 under the following assumptions: EBIT
Given the forecast below, estimate the fair market value of Kenmore Airs equity per share at the end of 2017 under the following assumptions:
- EBIT in year 2021 is $210 million and then grows at 4 percent per year forever.
- To support the perpetual growth in EBIT, capital expenditures in year 2022 exceed depreciation by $25 million, and this difference grows 4 percent per year forever.
- Similarly, working capital investments are $10 million in 2022, and this amount grows 4 percent per year forever.
- Kenmore Airs weighted-average cost of capital is 11 percent, and its tax rate is 40 percent.
- Kenmore Air has 50 million shares outstanding, and the market value of its interest-bearing liabilities on the valuation date equals $300 million.
Forecast for Kenmore Air, Inc. | ||||
Year | 2018 | 2019 | 2020 | 2021 |
Free cash flow ($ millions) | 40 | 85 | 97 | 112 |
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