Reference no: EM132752278
You have been asked to review a valuation of Tomelilla Chemicals AB, a publicly traded chemical firm, done by a valuation appraisal service. The service used the following estimates of cash flows and discount rates ears in making their valuation:
Year 1 2 3 4
Revenues 1000,00 1200,00 1440,00 1483,20
EBIT (1-t) 100 120 144 143,32
Net Cap Ex 60 72 86,4 88,99
FCFF 40 48 57,6 59,33
Terminal value 847,54 (year 4)
Cost of capital 12% 11% 10% 10%
HINT: The analyst has assumed that cash flows will grow at 3% in perpetuity after year 3 and used his estimate of year 4 cash flow to compute the terminal value.
Q1. Estimate the value of the firm, using the analyst's estimates of cash flows and costs of capital. What is then the return on capital in perpetuity assumed by the analysts?
Q2. If you believe that the firm will earn a return on capital EQUAL to its cost of capital in perpetuity after year 3, what is your estimate of firm value (holding the stable growth rate fixed at 3%)?
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