Answer Happy

ABB is a manufacturing company. Analysts make the following
forecasts for ABB for the forecast horizon between 20X3 and 20X5.
Assume that ABB’s cost of equity is 10%.
20X2A
20X3F
20X4F
20X5F
($ Millions)
($ Millions)
($ Millions)
($ Millions)
Net operating assets
1781
1737
1757
1782
Net debt
1433
1337
1314
1264
Equity
348
400
443
518
Net profit
197
200
235
(a) Derive the present value of free cash flow
to equity holders for the forecast horizon between 20X3 and 20X5
using the information above.
(b) What is the equity value of ABB at the end
of 20X2 using the discounted cash flow
model if analysts forecast the company’s free cash
flows to equity holders will grow at 3% p.a. constantly beyond the
forecast horizon?
(c) What is the equity value of ABB at the end
of 20X2 using the abnormal earnings
model if analysts forecast the company’s abnormal
earnings will grow at 3% p.a. constantly beyond the forecast
horizon?