Cathey Corporation currently has sales of $1,000, which are
expected to grow by 10% from Year 0 to Year 1 and by 4% from Year 1
to Year 2. The company currently has an operating profitability
ratio (OP) of 7% and a capital requirement ratio (CR) of 50% and
expects to maintain these ratios at their current levels. The
current level of total net operating capital (OpCap) is $510. Use
these inputs to forecast free cash flow (FCF) for Years 1 and
2.
Cathey Corporation has a 12% weighted average cost of capital.
Cathey’s free cash flows, estimated in the previous question, are
expected to grow at 4% beginning at Year 2 and thereafter. What is
the horizon value (use Year 2 for the horizon)? What is the current
value of operations?
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