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You have been asked to estimate the value of General Communications (GC). When evaluated at its long-term target capital structure, GC has a debt-to-equity ratio of 0.5, an equity beta of 1.10 and a pre-tax cost of debt of 7.5%. Sales were $2,000 million in 2002 and are expected to grow by 15% in 2003, 10% in 2004, and 5% thereafter. Earnings before interest and taxes are 15% of sales and the investment in operating working capital is 2.5% of sales. Capital expenditures are expected to be 5% of sales for the next two years and 3% thereafter. Depreciation expense is expected to be half of capital expenditures for the next two years. After that, new capital expenditures simply reflect a maintenance level of investment, i.e., capital expenditures equal depreciation expense. GC has been accumulating cash for a possible takeover of its main competitor and has $100 million in marketable securities. (The treasury bond rate is 5%, the market risk premium is 6.3%, and the firm has a tax rate of 40%.)
a) What are free cash flows in years 2003, 2004, and 2005?
b) What is the continuing value of free cash flows in year 2005?
c) What is the enterprise value of GC?
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