Following is a four-year forecast for Mayfair Modes. Year 2002 2003 2004 2005 Free cash flow ($ millions) -$85 -$32 $62 $66

a. Estimate the fair market value of Mayfair Modes at the end of 2001. Assume that after 2005, earnings before interest and tax will remain constant at $210 million, depreciation will equal capital expenditures in each year, and working capital will not change. Mayfair Modes' weighted-average cost of capital is 14 percent, and its tax rate is 40 percent.

b. Estimate the fair market value per share of Mayfair Modes' equity at the end of 2001 if the company has 50 million shares outstanding and the market value of its interest-bearing liabilities on the valuation date equals $300 million.

c. Now let's try a different terminal value. Estimate the fair market value of Mayfair Modes' equity per share at the end of 2001 under the following assumptions: (1) Free cash flows in years 2002 through 2005 remain as above. (2) EBIT in year 2005 equals $210 million and grows at 4 percent per year forever. (3) To support the perpetual growth in EBIT, capital expenditures in year 2006 exceed depreciation by $20 million, and this difference grows 4 percent per year forever. (4) Similarly, working capital increases $10 million in 2006, and this amount grows 4 percent per year forever.

d. Last, let's try a third terminal value. Estimate the fair market value of Mayfair Modes' equity per share at the end of 2001 under the following assumptions: (1) Free cash flows in years 2002 through 2005 remain as above. (2) The market value of interest-bearing liabilities remain constant at $300 million through 2005. (3) At year-end 2005, Mayfair Modes has reached maturity, and its equity sells for a "typical" multiple of year 2005 net income. Use 24 as a typical multiple.AppendixLO1