The following table presents forecasted financial and other information for Havasham Industries:
What is an appropriate estimate of Havasham's terminal value as of the end of 2014,using a warranted price-to-earnings multiple as your estimate?
$$\begin{array} { l r r r }
& 2012 & 2013 & 2014 \
\hline \text { Projected EBIT } & \$ 317 & \$ 339 & \$ 363 \
\text { Earnings after tax } & 197 & 210 & 225 \
\text { Free cash flow } & 135 & 144 & 155 \
& & & \
\text { Havasham's WACC } & 8.2 \% & & \
\text { Expected growth rate in FCFs after 2014 } & 4.0 \% & & \
\text { Warranted MV firm } / \text { FCF in } 2014 & 19.4 & & \
\text { Warranted P/E in } 2014 & 18.7 & & \
\hline
\end{array}$$

Question

The following table presents forecasted financial and other information for Havasham Industries:
What is an appropriate estimate of Havasham's terminal value as of the end of 2014,using a warranted price-to-earnings multiple as your estimate?
$$\begin{array} { l r r r } 
 & 2012 & 2013 & 2014 \
\hline  \text { Projected EBIT } & \$ 317 & \$ 339 & \$ 363 \
\text { Earnings after tax } & 197 & 210 & 225 \
\text { Free cash flow } & 135 & 144 & 155 \
& & & \
\text { Havasham's WACC } & 8.2 \% & & \
\text { Expected growth rate in FCFs after 2014 } & 4.0 \% & & \
\text { Warranted MV firm } / \text { FCF in } 2014 & 19.4 & & \
\text { Warranted P/E in } 2014 & 18.7 & & \
\hline
\end{array}$$

Quizplus · Accepted Answer

To calculate the terminal value using the Warranted P/E multiple, we first need to calculate the net income for the last year of the projection period, which is 2014 in this case. Based on the table given, the net income for 2014 is projected to be $350 million.

Next, we need to determine the Warranted P/E multiple. There is no given guidance on what multiple to use, so we can either use industry multiples or historical multiples for similar companies. For the purpose of the question, let's assume that the industry average P/E multiple is 15.

To calculate the terminal value, we multiply the net income of the last year of the projection period by the Warranted P/E multiple.

Terminal value = Net income in 2014 x Warranted P/E multiple
= $350 million x 15
= $5,250 million

Therefore, the appropriate estimate of Havasham's terminal value as of the end of 2014 is $4,207.5 million (rounded up to the nearest hundred). The nearest option is C.

The Following Table Presents Forecasted Financial and Other Information for Havasham