Solve using Excel $-$ Your firm would like to evaluate a proposed new operating division. You have forecasted cash flows for this division for the next five years, and have estimated that the cost of capital is $11\%.$ You would like to estimate a continuation value. You have made the following forecasts for the last year of your five$-$year forecasting horizon $($in millions of dollars$)$:

Year $5$

Revenues $$187\mathrm{.}2$

Operating income $83\mathrm{.}5$

Net income $54\mathrm{.}3$

Free cash flows $105\mathrm{.}9$

Book value of equity $357\mathrm{.}6$

a$.$ You forecast that future free cash flows after year $5$ will grow at $4\%$ per year, forever. Estimate the continuation value in year $5,$ using the perpetuity with growth formula.

b$.$ You have identified several firms in the same industry as your operating division. The average P$/$E ratio for these firms is $24.$ Estimate the continuation value assuming the P$/$E ratio for your division in year $5$ will be the same as the average P$/$E ratio for the comparable firms today.

c$.$ The average market$/$book ratio for the comparable firms is $2\mathrm{.}9.$ Estimate the continuation value using the market$/$book ratio.

Note : Assume that all firms $($including yours$)$ have no debt.