Do the following SVA Exercise:

The following information is given:

• Baseline (last year) sales: $250 million
• Sales growth rates: Base year = 15% with a fade rate of 1% a year for years 1-10: (increasing sales due to sustained competitive advantage and a differentiated product)[source: Strategic Plan]. Fade rate is the rate of decline per year (each year) from a base year.
• Sales growth rate in year 10 and forward: 5% (in year 11, the competition has caught up and the market has reached maturity) [source: Strategic Plan]
• Profit margin: Base year = 20%, with a fade rate of 1% a year for years 1-10: (during the period of competitive advantage, the firm can charge higher prices, but its profit margin slowly declines as competition increases) [source: Strategic Plan]
• Profit margin in year 10 and going forward: 10% [source: Strategic Plan]
• Fixed capital investment rate: 15% (for every dollar of new sales, we need an additional investment in fixed plant and equipment of $.15) [source: historical relationship]
• Working capital investment rate: 9% (for every dollar of new sales we need an additional investment in inventories and receivables of $.09) [source: historical relationship]
• Cash tax rate: 38% [source: historical relationship]
• Cost of capital: 11% [source: current yield on firm's debt and the cost of equity estimated using the Capital Asset Pricing Model, weighted average based on the target capital structure]
• Marketable securities: $20 million
• Market value of firm's debt: $50 million
• The firm has 5 million shares of common stock outstanding selling at:

oScenario 1 = $50/share and

oScenario 2 = $70/share.