First Choice Company is seeking buy another firm (MFG) as part of its strategic expansion growth. You have been hired as the consultant to value the firm. The current inflation rate in the economy is 3 %. MFG anticipates a growth of 4 % in revenue in the coming years. The shareholders of the target company anticipate return on equity between 6 and 8 %. Banks that lend to companies in the industry quote interest on long term loans at 5 % per annum in the long run. As a small company, MFG finances 70 % of its operations with equity. Based on research MFG conducted last year, working capital is expected to grow at 1 % of revenue while capital assets grow at 2 % per annum. The expected depreciation and amortization rate is 5 % per annum. Current Income tax rate is expected to increase by 2 % with no additional increase in deferred tax rate. The research also showed that the average annual short-term loan would be 15,000 with an interest of 10 %. MFGs fixed cost is expected to grow at 1% in the coming years. The income statement and balance sheet for the past two years are presented below: MFG Company Income statement for the period ending December 31, 2020 2020 2019 Revenue 250,000 200,000 Production expenses 110,000 100,000 Contribution margin 140,000 100,000 Other expenses: Amortization 35,000 37,500 Page 3 of 3 Property taxes 3,000 2,800 Interest on long term loan 9,800 10,000 Selling and administrative 15,000 14,000 Interest and bank charges 1,000 1,000 63,800 65,300 Earnings before taxes: 76,200 34,700 Income tax: Current Deferred 11,430 7,620 5,205 3,470 Net Earnings 57,150 26,025 Balance Sheet as at of December 31, 2020 2020 2019 Current assets: Cash 5,000 3,500 Accounts receivables 20,000 30,000 Inventories 150,000 120,000 175,000 153,500 Fixed Assets: Land 300,000 300,000 Building and Equipment 700,000 750,000 1,000,000 1,050,000 Total Assets 1,175,000 1,203,500 Accounts payable 20,000 19,000 Income tax payable 10,000 9,800 Current portion of long-term debt 50,000 51,000 Long-term debt 200,000 220,000 Total Liabilities 280,000 299,800 Equity 895,000 903,700

Note: Building and equipment are stated net of depreciation and amortization Instructions

Question: Estimate the value of the MFG using the discounted cash flow approach. Due to time constraint, use only 5 years for the estimation. Assume the contribution margin ratio for the current year for the valuation