You have been asked to review a valuation of Tomelilla Chemicals AB, a publicly traded chemical firm, done by a valuation appraisal service. The service used the following estimates of cash flows and discount rates ears in making their valuation:

Year	1	2	3	4
Revenues	1,000.00	1,200.00	1,440.00	1,483.20
EBIT (1-t)	100.00	120.00	144.00	148.32
Net Cap Ex	60.00	72.00	86.40	88.99
FCFF	40.00	48.00	57.60	59.33
Terminal Value				847.54
Cost of capital	12.00%	11.00%	10.00%	10.00%

 

HINT: The analyst has assumed that cash flows will grow at 3% in perpetuity after year 3 and used his estimate of year 4 cash flow to compute the terminal value.

Q1. Estimate the value of the firm, using the analyst's estimates of cash flows and costs of capital. What is then the return on capital in perpetuity assumed by the analysts?

 

Q2. If you believe that the firm will earn a return on capital EQUAL to its cost of capital in perpetuity after year 3, what is your estimate of firm value (holding the stable growth rate fixed at 3%)?