Question

Lumin Telecomm produces specialized telecommunication equipment and has

made losses each year over the three years it has been in existence—it has an ac-

cumulated net operating loss of $180 million. In the most recent year, the firm

reported an operating loss of $90 million on revenues of $1 billion. If you expect

the growth rate in revenues to be 20% a year for the next five years, and the pre-

tax operating margin to be

−

6% next year,

−

3% two years from now, 0% the

year after, 6% in four years, and 10% in five years (tax rate

=

40%), estimate:

a. The revenues and pretax operating income each year for the next five years.

b. The taxes you would have to pay and your after-tax operating income each

year for the next five years.

Answer 1

Year	Revenues	Pre-tax operating margin	Taxes	After tax operating income
1	1200000000	72000000	28800000	43200000
2	1440000000	43200000	17280000	25920000
3	1728000000	0	0	0
4	2073600000	124416000	49766400	74649600
5	2488320000	248832000	99532800	149299200

WORKINGS