Brook Corporation’s Estimated Value of Operations

Brook Corporation’s estimated value of operations can be calculated using the Gordon Growth Model, also known as the Dividend Discount Model (DDM). This model is based on the assumption of constant growth in free cash flow and provides a way to estimate the intrinsic value of a company’s operations.

The formula for the Gordon Growth Model is:

Estimated Value of Operations (EVO)=FCF×(1+�)WACC−�Estimated Value of Operations (EVO)=WACC−gFCF×(1+g)​

Where:

FCF = Free Cash Flow for the current year = $3.00 million

WACC = Weighted Average Cost of Capital = 13%

g = Growth rate of FCF

We will calculate the estimated value of operations for each of the given growth rates: -5%, 0%, 5%, and 10%.

(1) Growth Rate of -5%: $g=-5\%=-0.05$ EVO = \frac{3.00 \times (1 – 0.05)}{0.13 – (-0.05)} = \frac{3.00 \times 0.95}{0.13 + 0.05} = \frac{2.85}{0.18} = $15.83 million

(2) Growth Rate of 0%: $g=0\%=0$ EVO = \frac{3.00 \times (1 + 0)}{0.13 – 0} = \frac{3.00}{0.13} = $23.08 million

(3) Growth Rate of 5%: $g=5\%=0.05$ EVO = \frac{3.00 \times (1 + 0.05)}{0.13 – 0.05} = \frac{3.00 \times 1.05}{0.13 + 0.05} = \frac{3.15}{0.18} = $17.50 million

(4) Growth Rate of 10%: $g=10\%=0.10$ EVO = \frac{3.00 \times (1 + 0.10)}{0.13 – 0.10} = \frac{3.00 \times 1.10}{0.13 + 0.10} = \frac{3.30}{0.23} = $14.35 million

In summary, the estimated value of operations for Brook Corporation under different growth rate scenarios is as follows:

(1) -5% growth: $15.83 million

(2) 0% growth: $23.08 million

(3) 5% growth: $17.50 million

(4) 10% growth: $14.35 million

Question 2: Forecast of the Growth Rate for Muller’s Investigative Services

To estimate the growth rate (g) for Muller’s Investigative Services, we can use the Gordon Growth Model as well. In this case, we have the following information:

Current stock price = $80 per share

Year-end dividend (D1) = $4 per share

Required rate of return (k) = 14%

The Gordon Growth Model formula is:

Stock Price=�1�−�Stock Price=k−gD1​

We need to solve for g (the growth rate):

$80 = \frac{$4}{0.14 – g}

Now, let’s solve for g:

0.14 – g = \frac{$4}{$80}

$0.14-g=0.05$

$g=0.14-0.05$

$g=0.09$

So, the forecasted growth rate (g) for Muller’s Investigative Services is 9%.

In conclusion, based on the given information and the Gordon Growth Model, the forecasted growth rate for Muller’s Investigative Services is 9%. This suggests that the company’s dividends are expected to grow at an annual rate of 9% for the stock to be in equilibrium with a required rate of return of 14%.