Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You are trying to estimate the long run growth rate for unlevered free cash flows (FCFs) of a firm called Growth Inc. Growth Inc. is

You are trying to estimate the long run growth rate for unlevered free cash flows (FCFs) of a firm called Growth Inc. Growth Inc. is an IT firm that will always operate exclusively in the IT industry. You know that real GDP growth is expected to be 2% each year in the future, and that the IT industry's FCFs will have a nominal growth rate of 5% for the next 5 years. After that, the industry's FCFs will have zero real growth going forward. You expect that inflation will be 3% per year in the future. Growth Inc.'s FCFs have been growing at 10% for the last 5 years. You are estimating Growth Inc.'s FCFs for the next 5 years and expect that over those 5 years the growth rate of FCFs will be on average 4%. You believe that after those 5 years, Growth Inc.'s FCF will enter a constant growth period with a perpetual nominal growth rate ofg. You are wondering which growth rategyou should use. Given the data provided, you think that the following statement is most accurate:

a.You should pickgless than or equal to 10%

b.You should pickgless than or equal to 5%

c.You should pickgless than or equal to 4%

d.You should pickgless than or equal to 3

e.You should pickgless than or equal to 2%

f.You should pickgless than or equal to 1%

g.You should pickgless than or equal to 0%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Financial Reporting Standards An Introduction

Authors: Belverd Needles, Marian Powers

2nd edition

053847680X, 978-1111793234, 1111793239, 978-0538476805

More Books

Students also viewed these Finance questions

Question

When is stress positive? Give examples.

Answered: 1 week ago