business value One analyst estimated that Starr corporation, for the next five y

Question

business value

One analyst estimated that Starr corporation, for the next five years, the cash flow of the business year will be $ 80 million per year. In addition, it estimated the value at the end of the fifth year, will be $ 400 million.

1. If the cost of capital Starr is 12%, what is the value of the cash flows covering the next five years?

2. extremely difficult to estimate cash flows for the future .So, it is standard practice to group cash flows estimated to project beyond five years; this is known as terminal value. If Starr industry, companies sold five times their annual cash flow, what is the estimate of the terminal value Starr in 5 years would be?

Estimate the value today for starr; apply the same discount rate of terminal value (in terms of cash flows)

Explanation / Answer

1. VALUE OF THE CASH FLOWS:

YEAR CASH FLOWS COST OF CAPTIAL @ 12% DISC. CASH FLOWS

1 80 0.89 71.43

2 80 0.80 63.78

3 80 0.71 56.94

4 80 0.64 50.84

5 80 0.57 45.39

5 400 0.57 226.97

Present value of Cash flows 515.35

2. Terminal value of Starr in 5 years , if sold fives their annual cash flow

YEAR CASH FLOWS COST OF CAPTIAL @ 12% DISC. CASH FLOWS TERMINAL VALUE

1 80 0.89 71.43 357.14   

2 80 0.80 63.78 318.88

3 80 0.71 56.94 284.71

4 80 0.64 50.84 254.21

5 80 0.57 45.39 226.97

TERMINAL VALUE IS 1441.91

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