The following is a five-year discounted cash flow (DCF) forecast for Middlestates Electric, Inc., an electric utility company [Use spreadsheet Workbook Chapter 9 Problem 8]: ($ MM) Year 1 Year 2 Year 3 Year 4 Year 5 Operating income 2,039 2,325 2,169 2,430 2,615 Taxes 712 813 777 870 937 Depreciation and amortization 1,299 1,413 1,470 1,527 1,584 Change in working capital (169) 294 (223) 163 (205) Capital expenditures/asset sales (1,754) (3,432) 1,180 (2,720) (2,133) Free cash flow 703 (213) 3,819 530 924 Cash flows over the next five years are expected to fluctuate significantly due to key acquisitions and restructuring measures planned by Middlestates. After the fifth year, however, cash flow is expected to stabilize. Economists expect the long-term inflation rate to stabilize at 2.0 percent, and Middlestates expects real growth in sales to be 2.0 percent or less. Management has determined that the cost of capital is 10.28 percent. [Use spreadsheet Valuation Workbook provided] Estimate Middlestates' enterprise value.
The following is a five-year discounted cash flow (DCF)
|
($ MM) |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
Operating income |
2,039 |
2,325 |
2,169 |
2,430 |
2,615 |
|
Taxes |
712 |
813 |
777 |
870 |
937 |
|
|
1,299 |
1,413 |
1,470 |
1,527 |
1,584 |
|
Change in working capital |
(169) |
294 |
(223) |
163 |
(205) |
|
Capital expenditures/asset sales |
(1,754) |
(3,432) |
1,180 |
(2,720) |
(2,133) |
|
|
703 |
(213) |
3,819 |
530 |
924 |
Cash flows over the next five years are expected to fluctuate significantly due to key acquisitions and restructuring measures planned by Middlestates. After the fifth year, however, cash flow is expected to stabilize. Economists expect the long-term inflation rate to stabilize at 2.0 percent, and Middlestates expects real growth in sales to be 2.0 percent or less. Management has determined that the cost of capital is 10.28 percent. [Use spreadsheet Valuation Workbook provided]
Estimate Middlestates' enterprise value.
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