2.Past Perfect Inc. is a small firm that sells antique furnishings. In the most recent year, the firm generated $ 4 million inafter-tax operating incomeon revenues of $ 40 million; the firm reported book value of equity of $ 8 million and book value of debt of $ 4 million at the beginning of the year. During the year, the firminvested $2 million in a new warehousefor furniture (its only cap ex) and reported depreciation of $1 million in its income statement. The firm's only working capital item is its inventory, which increased by $ 200,000 during the course of the year. The cost of capital for the firm is expected to be 12% for the next 3 years and 10% thereafter. You have been asked to appraise the value of the company

a.Assuming that the firm maintains its existing return on capital and reinvestment rate for the next 3 years, estimate the expected free cash flow to the firm each year for the next 3 years.

b.Estimate the value of the firm at the end of year 3, assuming that the return on capital stays at the current level but the growth rate drops to 3%.

c.Assuming that Past Perfect Inc. has 5 million shares outstanding, estimate the value of equity per share. (You can assume that the book value of debt = market value of debt, and that the debt remained unchanged over the most recent year). You can also assume no cash holdings.