- Capitalspending and depreciation willgrow3% a
yearforthenextfiveyears.Notethatthenetcapital
expenditureisnegativeforeachoftheseyears—we
are assuming that the firmwill not have to make
significant reinvestments for the next five years.
Beyond year 5, capital expenditures will offset
depreciation. - There are no working capital requirements.
- Thedebtratio,whichwas95.35%attheendof1997,
willdropto70%by2002.Thecostofdebtis10%
for the next five years and 8% after that. - Thebeta for thestock will be 2 for thenext five
years, and drop to 0.8 thereafter (as the leverage
decreases).
Thelong-termbondrateatthetimeofthevaluationwas6%
andthetaxratewas35%.Basedontheseassumptions, we
estimated the cash flows (in £ millions).
The value of the assets of the firm is £2,278 million.
Thefinalinputweestimatedwasthestandarddeviationin
firmvalue.Sincetherearenodirectlycomparablefirms,we