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Consider the following data for an All-equity firm:
Consider the following data for an All-equity firm:
End of Year 1 2 3 4 5
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• (million dollars)
• Profit after taxes (NI) 5 6 8 10 11
• Free cash flow to equity 0 0 0 5 8
• Terminal value of equity 120
Stockholders required return on equity = 17%
•(a) What is the value of equity as of the beginning of year 1? What is the initial P/E multiple (with respect to year 1 earnings) implied by your valuation? What is the P/E multiple (with respect to year 5 earnings) assumed in the estimation of the terminal value? Explain the difference between the initial and the terminal multiples. Are they comparable?
•(b) What is the growth rate of profit after taxes assumed for year 6 and beyond? State the assumptions needed in order to answer this question. Estimate the P/E multiple with respect to year 6 earnings.
