7.17 In the year in which it intends to go public, a firm has revenues of $20 million and net income after taxes of

$2 million. The firm has no debt, and revenue is expected to grow at 20% annually for the next five years and 5% annually thereafter. Net profit margins are expected to remain constant throughout. Annual capital expenditures equal depreciation, and the change in working capital requirements is minimal. The average beta of a publicly traded company in this industry is 1.50, and the average debt-to-equity ratio is 20%. The firm is managed conservatively and will not borrow through the foreseeable future. The Treasury bond rate is 6%, and the marginal tax rate is 40%. The normal spread between the return on stocks and the risk-free rate of return is believed to be 5.5%. Reflecting the slower growth rate in the sixth year and beyond, the discount rate is expected to decline to the industry average cost of capital of 10.4%. Estimate the value of the firm’s equity.

Answer: $63.41 million