2.99 See Answer

Question: The Gamma Systems Manufacturing Corporation has


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 
2015 
2016 

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 

2015 

2016 

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 2017.
B. Estimate the value of Gamma Systems equity at the end of 2016 by applying the terminal value perpetuity equation.
C. By applying the terminal value equation at the end of 2016, what are we assuming about the future?


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2.99

See Answer