(2 Points) Calculate the free cash flow to equity holders for each future year. (1 Point) The firm has an equity beta of 1.10, the average market return (not excess return) is 14% and the current annual risk-free rate is 4.85%. What is the cost of equity capital (rE) of the firm? (2 Points) According to Miller \& Modiglianis proposition regarding the cost of equity in a world with taxes, what is the cost of equity for Finance Brews if it was 100% equity financed? (2 Points) Should the free cash flows that you calculated in part b be discounted at r0 or re ? Explain. (2 Points) Using the Gordon Growth Model to value any cash flow after year 3, what is the terminal value in year 3 ? Paul has finally opened his coffee and tea shop, 'Finance Brews', in downtown Pocatello. However, Paul is realizing that selling beverages is not his calling, and he is looking to sell his shop and come up with a good valuation of his stake in the firm. Since opening, Paul has taken Finance Brews public, and there are 100,000 shares outstanding of which Paul owns 51,000. Finance Brews is a levered firm with $8,000,000 in long-term debt that costs them 7% interest annually. Paul has projected the following net income (after taxes and interest) and partial balance sheet items for the following three years, which are given in the table below. Paul knows for certain that Finance Brews will have a long-term growth of the free cash flows at a constant rate of 4% after year 3. Paul has been paying a marginal tax rate of 25% and the current stock price in the market is $90 per share. a) (2 Points) Given that Paul wants to exclusively value his equity share in the business, which of the three valuation approaches that you are familiar with would be most appropriate here? Explain why. (2 Points) Calculate the free cash flow to equity holders for each future year. (1 Point) The firm has an equity beta of 1.10, the average market return (not excess return) is 14% and the current annual risk-free rate is 4.85%. What is the cost of equity capital (rE) of the firm? (2 Points) According to Miller \& Modiglianis proposition regarding the cost of equity in a world with taxes, what is the cost of equity for Finance Brews if it was 100% equity financed? (2 Points) Should the free cash flows that you calculated in part b be discounted at r0 or re ? Explain. (2 Points) Using the Gordon Growth Model to value any cash flow after year 3, what is the terminal value in year 3 ? Paul has finally opened his coffee and tea shop, 'Finance Brews', in downtown Pocatello. However, Paul is realizing that selling beverages is not his calling, and he is looking to sell his shop and come up with a good valuation of his stake in the firm. Since opening, Paul has taken Finance Brews public, and there are 100,000 shares outstanding of which Paul owns 51,000. Finance Brews is a levered firm with $8,000,000 in long-term debt that costs them 7% interest annually. Paul has projected the following net income (after taxes and interest) and partial balance sheet items for the following three years, which are given in the table below. Paul knows for certain that Finance Brews will have a long-term growth of the free cash flows at a constant rate of 4% after year 3. Paul has been paying a marginal tax rate of 25% and the current stock price in the market is $90 per share. a) (2 Points) Given that Paul wants to exclusively value his equity share in the business, which of the three valuation approaches that you are familiar with would be most appropriate here? Explain why