Use the multiple of earnings method to estimate the value of AFC's equity. As a first pass, use the average projected earnings over the first five years as the best estimate of earnings. Then assume the stock of publicly traded firms with somewhat similar technologies sells at an average of eight times earnings.

Table 2 Projected Cash Flow Statements (In Millions) Year 1 Year 2 Year 3 Year 4 Year 5 $102 51 $ 51 $129 65 $ 64 19 Sales Cost of goods sold Gross margin General/administrative expenses Debt service requirements Pre-tax earnings Taxes Net income Depreciation/amortization Terminal value Net cash flow 25 $20 10 $10 5 5 $0 0 $0 2 $117 59 $ 58 23 5 $ 30 $53 26 $27 10 5 $12 5 $7 6 5 $ 27 10 $ 29 12 13 14 $ 15 6 $ 17 6 $ 15 6 116 $137 $ 2 $13 $ 21 $ 23 Notes: (a) (b) Depreciation/amortization expense is included in the cost of goods sold, yet it is a noncash charge. Thus, it must be added back to net income to obtain the net cash flow in each year. The terminal value is the present value, as of the end of Year 5, of the equity cash flows that are expected to occur after Year 5. This value was obtained by assuming 10 percent annual growth in equity cash flows after Year 5 and a cost of equity of 30 percent: $21(1.10) Terminal value = = $116. 0.30-0.10