Assume now that you have been asked to forecast cash flows that you will have available to repurchase stock and pay dividends during the next five years for Conrail (from Problem 18). In making these forecasts, you can assume the following:
- Net income is anticipated to grow 10 percent a year from 1995 levels for the next five years.
- Capital expenditures and depreciation are expected to grow 8 percent a year from 1995 levels.
- The revenues in 1995 were $3.75 billion and are expected to grow 5 percent each year for the next five years. The working capital as a percent of revenues is expected to remain at 1995 levels.
- The proportion of net capital expenditures and depreciation that will be financed with debt will drop to 30 percent.
a. Estimate how much cash Conrail will have available to pay dividends or repurchase stocks over the next five years.
b. How will the perceived uncertainty associated with these cash flows affect your decision on dividends and equity repurchases?