David Smith from Oppenheimer is evaluating ABC Inc. for possible inclusion into growth portfolio in 2016. Short-term forecasts are tied up to Sales ($1,800 in 2016) and expected to be as follows over 2017-2018:

Sales growth rate forecasts=10% for two years

COGS is 60% of Sales

Net non-cash charge is fixed at 4% of Sales

Corporate tax rate is 21%

Investment in Fixed Capital(FC)= 35% of Increase in Sales

Investment in Working Capital(WC)=15% of Increase in Sales

As to long-term forecasts following 2018, Oppenheimer has different expectations on EBITDA (after tax) and FC/WC investments:

For EBITDA (after tax), David foresees a linear increase from 6% to a long-term constant rate of 10% over a 12-year period beginning at the end of 2018.

For ABC Inc.s FC and WC investments, David is expecting the growth rate to decline linearly from 16% to a perpetual growth rate of 8% over a 14-year period, again, starting at the end of 2018.

If WACC=11%, please compute the fair valuation of ABC Inc. using EBITDA approach

(Please illustrate the statement of cash flow, graph, stages, equation and work to receive full credit)

Equations:

FCF_t= EBIT_t (1-Tax rate)+ Depreciation_t FC_t WC_t ,