Consider the following startup company which produces a mobile device. The company has two types of costs. The costs of sales account for 30% of revenues and the R&D costs account for x% of revenues. In addition, the following assumptions are made and hold for all subsequent questions. The company sells one million units of the device at t=1 and two million units at t=2. The company sells the device for $10 per untt at t=1 and t=2. The company only exists for two period (t=1,2) and the liquidation (residual) value 1s zero. There 1s no CAPEX, no depreciation and no changes in working capital. The tax rate 15 30%. The cost of capital (1.e. discount rate) 15 12%. For questions (a) to (c), 1t 15 assumed that R&D costs accounts for x=20% of revenues. (a) Determine the operating income, net operating income and free cash flow of the company at t=1 and =27 [6p] (b) The owner wants to sell the company and hires an mnvestment bank to do a DCF valuation. What 1s the (DCEF-) value of the firm for the seller? [2p] A private equity fund 1s interested 1n acquiring this company at t=0. The owner of the company asks for $9 million The private equity fund 1s making a decision whether to acquire the company under the following assumptions. The acquisition price of $9 mullion (for the startup and its plant, properties and equipment) 1s paid in cash and fully written off in two vears in equal amount. In other words, the private equity fund uses linear depreciation of the acquisition price. The cost of capital 1s 12% as above. (c) Under the given assumptions, should the private equity fund buy the company for that price? [6p] (d) The private equity fund conducts a sensitivity analysis. Determine the R&D costs x% of revenues such that the private equity fund breaks even at that acquisition price. [4p]