assignment 2

QUESTION 5

1. Salt Services is unlevered with a beta of 1.75. The risk-free return is 4% and the return on the market is 12%. The firm expects cash flows of -$3M next year, $8M in year 2 and $21M in year 3. After year 3, they estimate that the cash flows will start to grow at 3% indefinitely. The firm currently has $30M in cash and 4M shares outstanding.

   a) Estimate the share price.

   b) If it is trading at $25, what is your recommendation? Explain