During college, Blake found that she could turn her baking obsessions into a delivery business named Sleepless Brownies. Blake is the sole employee and operator of the business. After graduation, Blake invites her friend Taylor to invest in expanding the operation and share the work. A decade passes, and they have expanded their operations into a multinational chain. Blake and Taylor decide to go public with their company and hire the investment bank Solomon Sisters (SS) to advise with issuance and marketing of securities. SS estimate the company cash flows for the next few years will be as follows:

Cash Flow (in thousands USD)

Year 1 $5,000

Year 2 $6,750

Year 3 $8,450

Year 4 $9,500

Year 5 $10,000

After 5 years, cash flow is expected to grow at a rate of 1% a year. During its market research, SS found that a comparable food delivery firm Awake Smoothie went public at a value of $200 million. It was expected to have cash flows of $4 million in its first year and grow at a rate of 4% perpetually.

a. When Blake was in college, what kind of firm was Sleepless Brownies?

b. Directly after Blakes graduation, what kind of firm was Sleepless Brownies?

c. What was the discount rate used to value Awake Smoothie? Can this discount rate be used to value Sleepless Brownies?

d. What is the present (year 0) value of cash flows for Sleepless Brownies from year 1 to year 5?

e. Suppose it is the end of year 5, what is the present value of future cash flows for Sleepless Brownies? (Hint: consider only the cashflows of year 6 and later).

f. Solomon Sisters advises Sleepless Brownies to sell 1 million shares at $40. Is this price fair?

g. How much of the value of Sleepless Brownies can be attributed to the NPV of new projects that were expected to be taken from year 3 onwards?

h. SS also gives an alternative scenario where cash flow in year 5 decreases to $8 million (due to higher upscaling costs). If 1 million shares are still to be issued, what is the fair price of one share under this scenario?