Reference no: EM133062742

Problem: Kollmorgen Corporation, a diversified technology company, reported sales of $194.9 million in 2012, and had a net loss of $1.9 million in that year. Its net income had traced a fairly volatile course over the previous five years:

The stock had a beta of 1.50, and the normalized net income is expected to increase at 10% a year until 2016, after which the growth rate is expected to stabilize at 5% a year (the beta will also drop from 1.50 to 1.00 after 2016). The depreciation amounted to $8 million in 2012, and capital spending amounted to $10 million in that year. Both items are expected to grow at 5% a year from 2013 to 2016, but after 2016 depreciation will equal capital spending. The firm expects to maintain a debt ratio (D/D+E) of 35%. The 10-year Government bond rate is 3.5% and the market risk premium is 6%.

(a) Based on the previous information, compute the normalized Free Cash Flow to Equity (FCFE) in each of the following four years from 2012 to 2016 using the debt ratio (δ) approach.