Latin Beats Corporation is a firm that specializes in Spanish music and videos. In the current year, the firm reported $20 million in after-tax operating income, $15 million in capital expenditures, and $5 million in depreciation. The firm expects all three items to grow at 10% for the next five years. Beyond the fifth year, the firm expects to be in stable growth and grow at 4% a year in perpetuity. You assume that earnings, capital expenditures, and depreciation will grow at 4% in perpetuity and that your cost of capital is 12%. (There is no working capital.)

a. Estimate the terminal value of the firm.

FCFF6= 10(1.1)^5 x (1.04) = 16.749 M

where the 1.1 and 1.04 come from >

b. What reinvestment rate and return and capital are you implicitly assuming in perpetuity when you do this?