A maker of pet toys, has $40 million in outstanding debt, 3.5 million shares outstanding. Sales for the current year (Year 1) are expected to be $30 million, and are expected to grow at 15% per year for the next four (4) years. After that, sales are expected to grow at 2% per year indefinitely (or forever). EBIT this year will be $10 million. EBIT, depreciation, capital spending, and the change in net working capital will grow at the same rate as sales. The appropriate weighted average cost of capital for the company is 8% and the tax rate is 21%.

 

a) Based on this information, what terminal value would you assign to this firm (in Year 5)?

b) Based on this information, what value would you assign to this firm today?