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[Terminal or Horizon Period Valuation Concepts] The Gamma Systems Manufacturing Corporation has reached its maturity stage and its net sales are expected to grow at a 6 percent compound rate for the foreseeable future. Management believes that as a mature venture the appropriate equity discount rate for Gamma Systems is 18 percent.
Gamma Systems Manufacturing Corporation
Balance Sheets
2009
2010
Cash
$50,000
$40,000
Accounts receivable
200,000
260,000
Inventories
450,000
500,000
Total current assets
700,000
800,000
Fixed assets, net
400,000
Total assets
$1,100,000
$1,300,000
Accounts payable
$130,000
$170,000
Accruals
50,000
70,000
Bank loan
90,000
Total current liabilities
270,000
330,000
Long-term debt
300,000
Common stock ($10 par)
Capital surplus
Retained earnings
180,000
220,000
Total liabilities and equity
Income Statements
Net sales
$1,400,000
$1,600,000
Cost of goods sold
780,000
900,000
Gross profit
620,000
Marketing
130,000
150,000
General and administrative
Depreciation
40,000
53,000
EBIT
347,000
Interest
45,000
57,000
Earnings before taxes
255,000
290,000
Income taxes (40%)
102,000
116,000
Net income
$153,000
$174,000
A. Estimate the free cash flows available to the equity investors for 2011.
B. Estimate the value of Gamma Systems equity at the end of 2010 by applying the terminal value perpetuity equation that was presented in Chapter 9.
C. By applying the terminal value equation at the end of 2010, what are we assuming about the future?
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