Fancy Flowers (FF) Inc. is an importer, grower and wholesaler-distributor of cut flowers. The company is privately owned.

You have recently been hired as the new CFO. Your assistant has just finished her BBA from Schulich and has estimated the WACC to be approximately 10%.

Valerie Anka is at the end of her operational reorganization plan and needs to know the value of her company.

1. Sales are expected to grow by 10% next year and 2% per year afterwards. As mentioned, the firm has been restructuring and selling assets. Other revenue represents interest income on the excess cash balances that the firm holds and the sale of various assets as per the operational restructuring.
2. Gross margins are expected to improve by 2 percentage points next year. Afterwards no further improvements are expected in gross margins.
3. Selling and general administration expenses are expected to be $5 million next year (the increase is intended to support the increased sales), but for year two and onwards SG & A is expected to grow with sales.
4. Depreciation and amortization are expected to be reduced to $3 million (due to the sales of the assets) and will grow with sales.
5. Capital cost allowance is expected to be $5.5 million next year and will grow with sales.
6. Interest expense is expected to remain constant for the forecasting period.
7. On average, firms in this industry expect cash balances to be about 5% of sales.
8. In the first forecast year, the average Accounts Receivable collection period is expected to improve by 3 days once the firm uses credit cards for customer payments.
9. Due to product mix changes, inventory will drop to 2% of sales.
10. In the next forecast year, the firm expects to sell $2 million more of their assets. However, net Fixed Asset additions will be $5 million next year and then increase with sales.
11. The line of credit will vary with sales and remain the same percentage of sales.
12. The days taken to pay suppliers will not change.
13. FF has a perpetual debt with a par value of $14 million and a current interest cost of 8 percent. However, interest rates have risen and now the debt would be issued with a 9% interest rate.
14. The long-term debt is paid down at a rate of $3 million per year.
15. The firm pays $100,000 in dividends each year.

Required:

Value the equity of FF by estimating and discounting the Free Cash Flows. Below are the current year financial statements.

Balance Sheet for Year Ended November 30, 2020

Assets
Cash	$8,000,000
Accounts Receivable	10,000,000
Inventories	2,000,000
Fixed Assets	36,000,000
Total assets	$56,000,000
Liabilities Line of Credit	$5,000,000
Accounts payable and accrued liabilities	2,000,000
Long term debt	14,000,000
Total liabilities	21,000,000
Shareholders equity Capital stock	25,000,000
Retained earnings	10,000,000
Total shareholders equity	35,000,000
Total liabilities and shareholders equity	$56,000,000

Fancy Flowers Inc.

Income Statement for the year ended November 30, 2020

Sales	$80,000,000
Other revenue	1,000,000
Total revenue	81,000,000
Cost of sales and expenses	64,000,000
Selling and administrative	4,000,000
Depreciation and amortization	3,500,000
Interest expense on long-term debt	1,500,000
Total expenses	73,000,000
Earnings before income taxes	8,000,000
Income taxes	2,400,000
Net earnings for the year	$5,600,000