Investment expenditures are forecast to grow in perpetuity

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Reference no: EM131021517

Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 39% of the company’s present value, and you believe that at this capital structure the company’s debtholders will demand a return of 5% and stockholders will require 12%. The company is forecasting that next year’s operating cash flow (depreciation plus profit after tax at 40%) will be $77 million and that investment expenditures will be $39 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year.

Reference no: EM131021517

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