Background

Roosters Healthy Foods Limited is one of the smaller companies in the supermarket industry.

In the most recent financial year they reported an operating income of $15 million; earnings per share of $1.50 and ordinary shareholders have just been paid a dividend of AUD$0.75 per share.

Their current level of cash is $1 million with non-cash working capital being $2 million compared to $1.5 million in the previous year.

The number of shares outstanding for Roosters Healthy Foods Limited is 45 million and these shares are currently trading at $5.60 per share.

Analysts forecast that the growth of Roosters Healthy Foods Limited will stabilise to 1% in two years' time and that the company's return on capital will be 15% for these two years and then decrease to 8% in the stable growth phase.

The unlevered beta for Roosters Healthy Food Limited is currently 1.4 but is projected by analysts to be 1.2 in the stable growth phase.

This year's capital expenditure for the company was $5 million while depreciation was $1 million.

The board of Roosters Healthy Foods Limited has adopted a constant debt ratio of 25% and the current debt is $3 million.

Roosters Healthy Foods Limited average cost of debt is 6% while the average yield on Australian Treasury bonds is 1.5% and equity market return is 4%.

The Australian corporate tax rate is 30%.

Answer the below question:

a). Estimate the costs of capital to use when valuing Roosters Healthy Foods Limited under the free cash flow to firm (FCFF). .

b). Estimate the firm reinvestment rates for both the high growth and stable growth periods and growth rate for the high growth period.

c). Estimate Roosters Healthy Foods Limited's free cash flow to firm (FCFF) value during the high growth period.

d). Estimate Roosters Healthy Foods Limited's terminal value of free cash flow to firm (FCFF).

e). Estimate the value per share for Roosters Healthy Foods Limited and provide a buy, sell or hold recommendation. Explain this recommendation in your own words.