QUESTION 1

Consider a company that is projected to generate revenues of $283 million next year. Analysts expect revenues to grow at a 3.7% annual rate for the following two years (until the end of year 3) and then at a stable rate of 1.5% in perpetuity. If the company is expected to have a gross margin of 75%, operating margin of 35%, net margin of 25%, tax rate of 16.2%, and reinvestment rate of 44%, what is its expected free cash flows in four years from today? Answer in millions, rounded to one decimal place (e.g., $2,315,612 = 2.3).

Hint: This is NOT a valuation question. It's asking you for FCFF4. First find Revenues at t=4 by extrapolating from Revenues at t=1 using the two growth rates. Then, go from revenues at t=4 to FCFF at t=4.