You are analyzing Delta Enterprises, a small publicly traded company with \($50\) million of debt outstanding, and 25 million shares, trading at

\($10/share.\) The firm generated \($40\) million in after-tax cash flows last year, and you estimate that these cash flows will grow 2% a year in perpetuity and that the cost of capital for the firm is 12%.

a. Estimate a value per share for the firm, assuming it has no cash balance.

b. Now assume that you find out that a significant portion of the firm’s revenues comes from one customer and that there is a 20 percent chance that this contract will be lost next year. Assuming that a lost contract will result in a 50% drop in the after-tax cash flows, estimate the value per share today. (You can assume that the growth rate and cost of capital will be unaffected).