9. You are trying to assist your line manager to value a target company. The recent financial statements of your target reported the following (rmb):

• Operating income = 8000 mil
• Tax rate = 25%
• Capital expenditures = 5000 mil
• Depreciation & amortization = 1500 mil
• Change in non-cash working capital = 80 mil
• Debt to equity ratio = 1.0
• Capital invested at the start of the year = 60,000 mil

Your regression analysis shows that the company has a beta of 2.0. The current risk free rate is 2.5% and the implied ERP of the market is 5.5%. According to the companys creditors, the company has a cost of debt at 8%. Your interview with the company executives suggest that the company will maintain its current re-investment rate for the next three years. You also assume the cost of capital and return on capital to remain static for the next three years. From year four onwards, you decided to employ a stable growth model to estimate the terminal value based on the following assumptions:

• Constant growth rate based on the national GDP growth expectation = 2%
• Cost of capital remains at the current level
• Tax rate = 25%
• Long term reinvestment rate = 20%

1. Calculate the current year cash flow to Firm
2. Calculate the current cost of capital
3. Estimate the intrinsic value of the firm