Following is the information for Spices, Inc. in year 2020 where it expects to reach its maturity stage. Cash flows are expected to grow at a long-term rate of 6% onwards. The firm has 9% cost of debt, 20% cost of equity, 25% tax rate and 0.4 target debt-to-value ratio.

Spices, Inc. also has $2,600,000 interest-bearing debt obligation and 100,000 shares outstanding.

Net income = $1,200,576

Interest = $312,000

Earnings before interest and taxes = $1,235,520

Depreciation expense = $924,480

Capital expenditure = $1,529,280

2019

2020

Required Cash

1,200,000

1,080,000

Surplus Cash

2,547,635

2,888,662

Accounts Receivable

3,456,000

3,697,920

Inventories

4,320,000

4,622,400

Accounts Payable

2,592,000

2,773,440

Accrued Liabilities

1,520,875

1,749,006

Bank Loan

2,840,000

2,600,000

Questions:

1. Determine the ventures enterprise value in 2019. (6 marks)

2. Suppose Spices, Inc. has also issued convertible preferred stocks with a conversion ratio of 2 and they are currently valued at $10 each. What is the minimum price that a share of the Spices, Inc.s common stock should be valued at? (2 mark)

3. Why is it important for the venture that convertible securities also be callable? (2 marks)