Below are selected financial statement projections the owner of PPI Plus Pet Stores has made for his company for the next 5 years. (All values on the income statement are in thousands.)

			5 YEAR FORECAST
			20Y1	20Y2	20Y3	20Y4	20Y5
Sales/Revenues			48,781	53,659	57,952	62,588	67,595
	Cost of Sales/Revenues		31,220	34,342	36,800	39,743	42,923
GROSS PROFIT			17,561	19,317	21,152	22,845	24,672
	General & Admin Expense		13,659	14,756	15,647	16,899	18,251
	Depreciation		255	239	227	219	213
TOTAL OPERATING EXPENSE			13,914	14,995	15,874	17,118	18,464
EBIT			3,647	4,322	5,278	5,727	6,208
	Interest expense		1,300	1,450	1,425	1,366	1,242
PROFIT BEFORE TAXES			2,347	2,872	3,853	4,361	4,966
	Income Tax (30%)		704	862	1,156	1,308	1,490
NET PROFIT			1,643	2,010	2,697	3,053	3,476
NET CASH AFTER OPERATIONS			2,316	3,445	3,552	3,651	3,954
PROJECTED CAPITAL EXPENDITURES			400	420	500	515	750

After the end of 5 years, the company expects that all cash flows will continue to grow at 2.5% per year indefinitely.

The company has 1 million common shares outstanding with a total book value of $9 million. Last year, the company paid a dividend of $4 per share. The risk-free rate is 1% and the market risk premium (Rm - Rf) is 8% for the industry. Comparable public companies in the industry have a Beta of 1.7. The firm also has $2.2 million of bonds outstanding with a coupon rate of 7% that is currently trading at 110, with a yield to maturity of 6%. There are no preferred shares and the tax rate is 30%.

(a) A buyer has recently approached the owner and would like to buy the company. What is an appropriate discount rate? (10 marks)

(b) What is a fair purchase price for this company? (Round to the nearest million) (10 marks)

(c) Suppose the buyer offers to purchase all of the outstanding shares for $25 million. What should the company do? (5 marks)

(d) If your answer is different from the acquirer's offer, provide TWO potential reasons to explain why there might be a difference between the two valuations.