Calculate the appropriate discount rate of the estimated FCF and terminal value.

Question 1 An equity analyst is valuing the company SPOT, with reference date of year-end 2019. The equity analyst expects the Free Cash Flows to Firm (FCF) to be as shown in Table 1. Table 1 Year 2019 Year 2020 Year 2021 Year 2022 Year 2023 Year 2024 8000 8600 9200 9750 10200 10950 Additionally, the equity analyst has the following information and further assumptions: (i) risk-free interest rate: 3%; (ii) target capital structure: debt/(debt+equity) ratio of 45%; (iii) expected debt spread: 4%, (iv) reference equity risk premium: 6%; (v) equity beta: 1.90; (vi) tax rate: 20%; and (vii) expected nominal growth of FCF in perpetuity: 2%. The equity analyst is also assuming that at year-end 2019 net debt will be 40000 and financial investments will be 12000. The number of shares of SPOT is 7800 and the current market price of the company is 10.15 per share. a) Considering the Capital Asset Pricing Model (CAPM) and the target capital structure of SPOT, calculate the appropriate discount rate of the estimated FCF and terminal value. Explain your answer. Present your answer rounded to two decimal places (for example, 10.325% rounded to 10.33%). [10 marks]