1. The free cash flows for year 7 are used because: PV6 = FCF7/(r-g).
2. For the market-book ratio method, consider what it would fundamentally
cost to buy the firm at time H=6. Well, One could buy the firm by buying
all of the assets owned by the firm at H=6. Great! However, this does not
consider any growth opportunities after H=6. Since the Concatenator
Manufacturing Division is growing it is unlikely that it would be sold for
the value of its assets. The 'industry' maket-book ratio adjusts for this
growth since it compares stock price to assets for firms of similiar
companies (risks). Market-book ratios greater than 1.00 imply that
investors are willing to pay more for a firm than merely the value of its
assets.