Weassumethatthisfirmisofaverageriskandhasabetaof
1.Witharisk-freerateof5%andariskpremiumof4%,the
cost of equity that we compute for Tivoli Enterprises is 9%:
We also assume that this cost of equity will hold forever.
To value this firm, we assume that revenues, netincome,
dividends, capital expenditures, depreciation, and net debt
cashflowswillgrowat10%ayearforthenextfiveyears.In
addition,weassumethatnoncashworkingcapitalwillremain
atitsexistingproportionofrevenues(5%).Inthefollowing
table,weestimatethefreecashflowstoequityanddividends
each year for the next five years (in millions of dollars):
Attheendofyear5,letusassumethatthefirmwillbein
stablegrowth,growing4%ayearinperpetuity,andthatthe
return on equity will be 12% in perpetuity as well. To
estimatetheterminalvalueofequityintheFCFEmodel,we
first compute a stable-period equity reinvestment rate: