5. You have decided to use the discounted cash flow approach to value AFC. Based on the riskiness of the new business you believe a 30 percent discount rate is appropriate. What is the forecasted value of the AFC to its equity holders? (Hint: Use the cash flows in Table 2 as a starting point.) Table 2 Projected Cash Flow Statements (In Millions) Year 1 Year 2 Year 3 Year 4 Year 5 $7 Sales $20 $53 $102 $117 $129 Cost of goods sold 10 26 51 59 65 Gross margin $10 $27 $ 51 $ 58 $ 64 General/administrative expenses 5 10 19 23 25 Debt service requirements 5 5 5 5 10 Pre-tax earnings $0 $12 $ 27 $ 30 $ 29 Taxes 0 5 12 13 14 Net income $0 $ 15 $ 17 $ 15 Depreciation/amortization 2 6 6 6 6 Terminal value 116 Net cash flow $ 2 $13 $ 21 $ 23 $137 Notes: (a) Depreciation/amortization expense is included in the cost of goods sold, yet it is a noncash charge. Thus, it must be added back to net income to obtain the net cash flow in each year. (b) The terminal value is the present value, as of the end of Year 5, of the equity cash flows that are expected to occur after Year 5. This value was obtained by assuming 10 percent annual growth in equity cash flows after Year 5 and a cost of equity of 30 percent: $21(1.10) Terminal value = $116. 0.30 -0.10