Your company is evaluating a supplier as an acquisition target. A new analyst in your department estimated a value of $850 million for the target firm, using the following assumptions:

The firm has a cost of capital of 11%.

The firm is in a mature industry and will be growing at the inflation rate (2% a year) forever.

The firm will not need to reinvest any of its after-tax cash flows since it is growing only at the inflation rate.

As a more experienced analyst, you believe that the firm will be able to generate an excess return (a return on its capital in excess of the cost of capital) of 4% forever, and think that the estimated value for the firm is incorrect.

a)Part 1 What is the analyst forecasting for next year cash flow (in $ million)?

b)Part 2 What is the reinvestment rate necessary to achieve the given growth?

c)Part 3 What is the correct value of the firm (in $ million)?