Company A has just been operating for 2 years and revenues in year (-1) and year(0) were respectively $ 15MM and $114 MM respectively. Capital spending in year (0) was $180MM and current debt outstanding is $200MM. You are also given the following additional information based on assumptions made listed on Page 4:

Year	Growth Rate (g)	Year	Growth Rate (g)
1	150	6	30
2	100	7	20
3	80	8	15
4	60	9	10
5	40	10	5
		11 (last)	3.5

From year (11) onwards, g becomes perpetual. Note that to estimate the revenue growth rate, one should expect that g would decrease over time as revenue becomes larger, so the key numbers to focus on are the starting and ending revenues ( year (11) ) rather than focusing on the year-by-year rates. 5 b.)In year (0), EBIT for Company A was $ (80) MM giving an operating margin (OM) of (70) %. For a comparable company having operating for 13 years, the OM is approximately + 10%.

Assume the operating margin for the coming 11 years be given as follows:

Year	OM (%)	Year	OM (%)
0	-70	6	-6
1	-54	7	0
2	-38	8	2.5
3	-28	9	5
4	-18	10	7.5
5	-12	11	10

One can then see the operating margin improves progressively over time! OM is, by definition: OM = ( Revenue -- EBIT ) / Revenue

c.) The corporate tax rate is assumed to be zero when Company A is operating at a loss and 40% when the company turns out a positive profit.

d.) Yearly reinvestments in capital ( for additional fixed assets and non-cash working capital ) is given to be proportional to the increase in revenues and the proportional constant is the firms Capital/revenue ratio. In this problem, assume that this ration equals 0.5.

e.) The bottom-up for Company A for the initial 5 years of operations is 2.5. It then drops by the same amount per year to 1.0 in year (11). This shows that the risk of the company decrease as profitability progressively improves. 6

f.) 3-month T-bill yields 3% and the market risk premium is assumed to be 4%.

g.) The average cost of debt is 8% based on the firms latest borrowing rate when the company was operating at a loss, then the rate would drop to 5% in year (11) as profitability improves as measured by the EBIT/I ratio where I is the interest payable.

h.) Assume the outstanding debt of $ 200 MM is to stay at this level throughout.

i.)After a total of 13 years of operation, it is safe to assume that the Return on Capital ( ROC ) of Company A to be a constant 10%; implying that: Reinvestment Rate = Stable Growth Rate on Revenue / Constant ROC