Hectoritis Corporation currently has a free cash flow (FCF) of $15 million. A reputable analyst estimates that this FCF is anticipated to increase by 11% per year for the next 5 years. The analyst estimates that at the end of 5 years the company's terminal value will be based on the year 5 FCF and a long-tem rate FCF growth rate of 5%.

Suppose the Hectoritis b=1.4, the rf = 3%, the market risk premium [E(rM) - rf ]= 14%, and Hectoritis has 8 million shares outstanding.

a. What is the terminal value?

b. How should the analyst value the shares of the company? Assume all cash flows occur at year-end.

HECTORITIS CORPORATION Current FCF Anticipated growth rate, years 15 Beta, rf E(rM)rf WACC Long-term growth rate, after year 5 Number of shares outstanding Anticipated \begin{tabular}{|c} Year \\ 1 \\ 2 \\ \hline 3 \\ \hline 4 \\ \hline 5 \\ \hline \end{tabular} Terminal value calculation FCF in year 5 Part a Terminal value Valuing Hectoritis Corporation Present value of FCFs, years 1-5 Present value of terminal value Value of Hectoritis Part b Per share value