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 12%. 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 $184.4

Operating income 51.1

Net income 33.2

Free cash flows 92.8

Book value of equity 272.3

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

a. You forecast that future free cash flows after year 5 will grow at 3 % 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 27

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 2.4 Estimate the continuation value using themarket/book ratio.