3. Following Q2, the financial manager of company XXX is tempted to acquire company YYY. Company YYY is a private company without stock market price. However, it is in the same line of business as company XXX, you can assume it has the same business risk. The following table sets out the information that you need to forecast company YYYs free cash flows (the highlighted numbers are all forecasted numbers). You can assume the cash flow in year 0 has already occurred when you calculate the value of the business. Value horizon is 3 years. From year 4 onward, you assume a long-term growth rate of 4% each. Now assume Company XXX plans to finance the purchase with $30,000 of debt. It intends to pay down the debt to $22,599 in year 3 so that the debt ratio at the horizon is 25%, the normal debt ratio of company XXX.

0 1 2 3 4 Sales 70000 71000 72000 73000 74000 Cost of goods sold 56000 56800 57600 46080 59200

Net working capital 10000 10142 10286 10429 10571 Depreciation 3500 4500 4500 4500 4500 Gross fixed assets 60000 65000 70000 75000 82000 Debt 30000 28000 25000 22599 Investment in fixed

assets (change in gross

fixed assets) 7000 Investment in

working capital 300

You will use APV method to calculate the value of company YYY (keep four decimals). Show are your inputs to get full credit. (a). Whats profit after tax in year 3? Show your inputs to get full credit. [5 points] (b). Whats free cash flow in year 3? Show your inputs to get full credit. [10 point] (c). Whats after-tax WACC and cost of capital of company XXX? [10 point] (d). Whats horizon value (not the present value)? [10 point] (e). Whats the base-case PV of company? Whats the PV of interest tax shields in year 1-3? Whats the PV of company YYY? [15 points]