Question
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 3% 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 2% 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 pick g less than or equal to 10%
b.You should pick g less than or equal to 5%
c.You should pick g less than or equal to 4%
d.You should pick g less than or equal to 3%
e.You should pick g less than or equal to 2%
f.You should pick g less than or equal to 1%.
g.You should pick g less than or equal to 0%
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