Terminal value refers to the valuation attached to the end of the planning period; it captures the value of all subsequent cash flows. Estimate the value today for each of the following sets of future cash flow forecasts.

a.Claymore Mining Company anticipates that it will earn firm FCFs of $4 million per year for each of the next five years. Beginning in year 6, the firm will earn FCF of $5 million per year for the indefinite future. If Claymores cost of capital is 10%, what is the value of the firms future cash flows?

b.Shameless Commerce Inc. has no outstanding debt and is being evaluated as a possible acquisition. Shamelesss FCFs for the next five years are projected to be $1 million per year, and, beginning in year 6, the cash flows are expected to begin growing at the anticipated rate of inflation, which is currently 3% per annum. If the cost of capital for Shameless is 10%, what is your estimate of the present value of the FCFs?

c.Dustin Electric Inc. is about to be acquired by the firms management from the firms founder for $15 million in cash. The purchase price will be financed with $10 million in notes that are to be repaid in $2 million increments over the next five years. At the end of this five-year period, the firm will have no remaining debt. The FCFs are expected to be $3 million a year for the next five years. Beginning in year 6, the FCFs are expected to grow at a rate of 2% per year into the indefinite future. If the unlevered cost of equity for Dustin is approximately 15% and the firms borrowing rate on the buyout debt is 10% (before taxes at a rate of 30%), what is your estimate of the value of the firm?

Please use below template for solution:

PROBLEM 9-9
a. Claymore Mining Company
Given
Unlevered Cost of Capital	10.00%
	Year
	1	2	3	4	5	6+
FCF	$ 4,000,000.00	$ 4,000,000.00	$ 4,000,000.00	$ 4,000,000.00	$ 4,000,000.00	$ 5,000,000.00
Solution
Present value of free cash flows:
Planning period
Terminal value
Enterprise Value
b. Shameless Commerce, Inc.
Given
Unlevered Cost of Capital	10.00%
growth rate in terminal cash flows	3.00%
	Year
	1	2	3	4	5	6+
FCF	$ 1,000,000.00	$ 1,000,000.00	$ 1,000,000.00	$ 1,000,000.00	$ 1,000,000.00	$ 1,030,000.00
Solution
Valuing the unlevered cash flows
Planning period
Terminal value
Enterprise Value
c. Dustin Electric, Inc.
Given
K-WACC (Cost of capital)	10.00%
growth rate in terminal cash flows	2.00%
Corporate tax rate	0.30
Cost of debt	0.10
Unlevered cost of equity	15.00%
Solution
	Year
	0	1	2	3	4	5	6+
FCF		$ 3,000,000.00	$ 3,000,000.00	$ 3,000,000.00	$ 3,000,000.00	$ 3,000,000.00
Debt	$10,000,000.00
Interest
Tax shields
After-tax interest
debt principal paid
Equity FCF
Valuing the unlevered cash flows
Planning period
Terminal value
Valuing the interest tax savings
Planning period
Terminal value
Enterprise Value = Value of the unlevered firm + Value of interest tax savings
Less: Debt (at time 0)
Equity Value