5 (10 marks) Acme is expected to sell 500,000 units of its product in year 1. From year 2 to year 5, Acme's sales volume (in units) is expected to increase by 10% each year. After year 5, Acme's sales volume is expected to increase by 1% in perpetuity. The selling price per unit is expected to be $10 in year 1 and Acme is expected to increase the selling price by 1% each year thereafter. Acme's EBIT margin is expected to be 40% of (dollar) sales for the next 4 years and 30% thereafter. Acme's depreciation expense is expected to be 20% of sales for the next two years and 10% thereafter. Acme's capital expenditures are expected to be 25% sales for the next three years and 10% thereafter. Acme's net working capital is $450,000 today and is always expected to be 10% of sales in future years. (Note that this is the net working capital, not the change in net working capital.) Acme's shares are trading at $10 per share and Acme has 2,000,000 shares outstanding. The market value of Acme's debt is $5,000,000. Acme's after-tax cost of debt is 4%, the risk-free rate is 1%, the market risk premium is 12%, and the unlevered beta for comparable firms is 1.2. The corporate tax rate is 35%. Assume all cash flows occur at the end of the year. Using the DCF model, are Acme's shares undervalued or overvalued? Based on the DCF, what is the fair value for Acme shares? Answer based only on the information provided. (Show all your work. Your answer must be handwritten.)