[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
|
500,000
|
|
Total assets
|
$1,100,000
|
$1,300,000
|
|
Accounts payable
|
$130,000
|
$170,000
|
|
Accruals
|
50,000
|
70,000
|
|
Bank loan
|
90,000
|
90,000
|
|
Total current liabilities
|
270,000
|
330,000
|
|
Long-term debt
|
300,000
|
400,000
|
|
Common stock ($10 par)
|
300,000
|
300,000
|
|
Capital surplus
|
50,000
|
50,000
|
|
Retained earnings
|
180,000
|
220,000
|
|
Total liabilities and equity
|
$1,100,000
|
$1,300,000
|
|
Income Statements
|
2009
|
2010
|
|
Net sales
|
$1,400,000
|
$1,600,000
|
|
Cost of goods sold
|
780,000
|
900,000
|
|
Gross profit
|
620,000
|
700,000
|
|
Marketing
|
130,000
|
150,000
|
|
General and administrative
|
150,000
|
150,000
|
|
Depreciation
|
40,000
|
53,000
|
|
EBIT
|
300,000
|
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?