Question: Gemco Jewellers earned $ 5 million in after-tax operating income in the most recent year. The firm also had capital expenditures of $ 4 million and depreciation of $ 2 million during the year, and the non-cash working capital at the end of the year was $ 10 million.
a. Assuming that the firm's operating income will grow 20% next year, and that all other items (capital expenditures, depreciation and non-cash working capital) will grow at the same rate, estimate the free cash flow to the firm next year.
b. If the firm can grow at 20% for the next 5 years, estimate the present value of the free cash flows to the firm over that period. You can assume a cost of capital of 12%.
c. After year 5, the firm's capital expenditures will decline to 125% of revenues, and the growth rate will drop to 5% (in both operating income and non-cash working capital). In addition, the cost of capital will decline to 10%. Estimate the terminal value of the firm at the end of year 5.
d. Estimate the total value of the operating assets of the firm.