The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market

by Pat Dorsey

Biomet’s free cash flow has increased pretty steadily over the past several years, so let’s use $180 million as our estimated amount for 2004. (Biomet’s historical free cash flows are shown in Figure 11.8.) If we increase free cash flow at 15 percent over the next five years and conservatively assume that Biomet starts to lose market share and grow more slowly after five years, we see that the present value of the free cash that Biomet will generate over the next 10 years is about $2 billion. (I used a relatively low discount rate of 9 percent—versus a market average of 10.5 percent—because Biomet is a very financially stable company.) Add in our perpetuity value of about $3.5 billion, and Biomet is worth $5.5 billion, or about $21 per share