Your firm would like to evaluate a proposed new operating division. You have forecasted cash flows for this division for the next fiveyears, and have estimated that the cost of capital is 11%. You would like to estimate a continuation value. You have made the following forecasts for the last year of yourfive-year forecasting horizon(in millions ofdollars):

Year 5

Revenues $232.5

Operating income 100.2

Net income 65.1

Free cash flows 100.8

Book value of equity 249.6

Note: Assume that all firms(including yours) have no debt.

a. You forecast that future free cash flows after year 5 will grow at 4% peryear, forever. Estimate the continuation value in year5, using the perpetuity with growth formula.

b. You have identified several firms in the same industry as your operating division. The averageP/E ratio for these firms is 18. Estimate the continuation value assuming theP/E ratio for your division in year 5 will be the same as the averageP/E ratio for the comparable firms today.

c. The averagemarket/book ratio for the comparable firms is 4.5. Estimate the continuation value using themarket/book ratio.