8–20. Acquirer Company’s management believes that there is a 60 percent chance that Target Company’s free cash flow to the firm will grow at 20 percent per year during the next five years from this year’s level of $5 million. Sustainable growth beyond the fifth year is estimated at 4 percent per year. However, they also believe that there is a 40 percent chance that cash flow will grow at half that annual rate during the next five years, then at a 4 percent rate thereafter.

The discount rate is estimated to be 15 percent during the high-growth period and 12 percent during the sustainable-growth period. What is the expected value of Target Company?