Laura Martin, an equity research analyst presents her DCF valuation analysis of Cox Communications as of March 1999 to you. She uses an explicit forecast of 10 years (1999-2008), and a terminal value for cash flows beyond 2009. She estimates the terminal value as of end of the explicit forecast period (i.e., 2008) using a EBITDA multiples approach rather than a growing perpetuity model based on free cash flows. You are trying to understand the implicit assumptions underlying the usage of multiples in her estimation of the terminal value. Based on her DCF model, Laura estimates the EBITDA in 2008 to be $2,958 million, the FCF in 2008 to be $1,804 million and the WACC to be 9.3% in the explicit forecast period (i.e., 1999-2008) as well as in the stable growth period (i.e., 2009 and beyond).
A. If she uses a terminal EBITDA multiple (i.e., terminal value/EBITDA multiple) of 13, what is her estimate of terminal value (in millions of dollars, rounded to two decimals) based on this approach?
B. What is the implied terminal FCF multiple (i.e., terminal value/FCF multiple) if she were to estimate the terminal value to be the same as in part A above?
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C. What is the implied growth rate of FCF underlying her terminal value estimate in part B above?