Q4 Part C

The following forecasts were prepared in 2006 for a firm with a cost of capital of 12% (amounts are in millions of dollars:

The book value of equity at the end of 2006 was 596 and there is no net financing debt.

Required:

1.Forecast cash flow from operations and frees cash flow for each of the five years;

2.Estimate the value of the firm using the discounted abnormal operating earnings valuation model.

Q5 Part B

During 2006, a Macquarie Bank-lead Private Equity consortium made close to an 11 billion dollars bid for QANTAS shares ($5.45 per share). The bidders will finance the proposed acquisition with close to 10 million dollars debt and the rest with equity. This bid represents approximately a price of 60% above the average trading price of QANTAS share the six months prior to the bid. Once debt has been added to the equity purchase price, the Private Equity consortium purchase price for the firm is 16 million dollars.

The following forecast for QANTAS has been developed (in million). The firm cost of capital for QANTAS is 6.5%

Required:

a)Using the discounted abnormal operating earnings valuation model, what assumption would you need to make about the growth rate of the terminal residual operating income to get similar valuation to that of the Private Equity consortium value of the firm (16 billion dollars).

a)How reasonable do you think this assumption is?

How to do these two question?