7.17 In the year when 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 5 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 not expected to borrow in the foreseeable future. The Treasury bond rate is 6%, and the marginal tax rate is 40%. The risk premium on stocks is 5.5%. Reflecting slower growth beyond the fifth year, 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. (Appendix)

Answer: $63.41 million