Laura Martin, an equity research analyst presents her DCF valuation analysis of Cox Communications as

of March 1999 to you. She uses an explicit forecast of 10 years (1999-2008), and a terminal value for cassing an

beyond 2009. She estimates the terminal value as of end of the explicit forecast period (i.e., 2008) using an EBITDA multiples approach rather than a growing perpetuity model based on free cash flows. You are trying to understand the implicit assumptions underlying the usage of multiples in her estimation of the terminal value.

Based on her DCF model, Laura estimates the EBITDA in 2008 to be $2,958 million, the FCF in 2008 to be $1,804 million and the WACC to be 9.3% in the explicit forecast period (i.e., 1999-2008) as well as in the stable growth period (i.e., 2009 and beyond). [All parts together: 5 points]

A. If she uses a terminal EBITDA multiple (i.e., terminal value/EBITDA multiple) of 15 to estimate the terminal value, what is the implied growth rate of FCFs during the stable growth period (i.e., 2009 and beyond)?

Implied growth rate of FCFs during the stable growth period (in %, rounded to two decimals):

Calculations:

B. As an investor, you conjecture that FCFs will grow at a modest annual growth rate of 2% during the stable growth period (i.e., 2009 and beyond) rather than the implied growth rate estimated in part A above. What will the implied terminal FCF multiple (i.e., terminal value/FCF multiple) be that is consistent with a 2% annual growth rate of FCFs during the stable growth period? Similarly, what will the corresponding implied terminal EBITDA multiple (i.e., terminal value/EBITDA multiple) be that is consistent with a 2% annual growth rate of FCFs during the stable growth period?

Implied terminal FCF multiple (rounded to two decimals):

Implied terminal EDITDA multiple (rounded to two decimals):

Calculations: