Question - Following table shows the 5 year projections for AllInOne, Inc. Year + 6 values are calculated with 3% growth and are provided to be used for calculating continuing/terminal value of AllInOne. The cost of equity capital is 9.80%. Assume net income and comprehensive income will be identical and the change in cash account is required for liquidity.
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AllInOne, Inc. Selected Financial information (amounts in millions and amounts are rounded)
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Year + 1
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Year + 2
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Year + 3
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Year + 4
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Year + 5
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Year +6
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Common equity, beginning of year
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$165.8
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$1777
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$192.1
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$206.1
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$216.7
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$226.9
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Net income
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24.6
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25.8
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27.6
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29.6
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31
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31.9
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Dividends
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-12.7
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-11.4
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-13.6
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-19
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-20.8
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-25.1
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Common equity, end of year
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$177.7
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$192.1
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$206.1
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$216.7
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$226.9
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$233.7
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Cash flow from operations
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$45.4
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$51.2
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$56.3
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$61.5
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$67.1
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$70.2
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Cash flow for investing
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-35.2
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-41.1
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-41.9
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-42.7
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-43.5
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-44.5
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Cash flow for long-term debt
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-0.5
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2
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0
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1
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-2
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0
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Cash flow for dividends
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-12.7
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-11.4
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-13.6
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-19
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-20.8
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-25.1
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Net change in cash
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($3.0)
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$0.7
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$0.8
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$0.8
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$0.8
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$0.6
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Questions:
a. Compute the value of AllInOne as of January 1, Year + 1, using the residual income model.
b. Repeat Requirement a using the present value of expected free cash flows to the common equity shareholders.
c. Repeat Requirement a using the dividend discount model.
d. Identify the reasons for any differences in the valuations in Requirements a-c.
e. Suppose the market value of AllInOne on January 1, Year+1, is $294.98 million. Based on your valuations in Requirements a-c, what is your assessment of the market value of this firm?