HTBB Enterprises, a health supplement manufacturer, has been gaining market share for three

years due to the aging population. The free cash flow to equity $($FCFE$)$ in $2022$ was $$10$ million.

This figure is expected to grow speedily as aging population is increasing over the years. The

growth rates of cash flows of HTBB for next five years are estimated at $20\%,50\%,40\%,30\%,$

and $20\%.$ However, the cash flow after fifth year is expected to grow at a constant growth rate

$5\%.$ WSTB Ltd$,$ A larger pharmaceutical company, is interested in HTBB$$s health supplement

product, which can add to its current product mix. HTBB$$s estimated cost of equity is $15\%.$

Required:

$($a$)$ What price WSTB offers HTBB based on the intrinsic value? What would be the

market reaction to HTBB$$s and WSTB$$s stock prices?

$(7$ marks$)$

$($b$)$ What are the key challenges of the discounted cash flow $($DCF$)$ model in valuing the

firms?

$(6$ marks$)$

$($c$)$ List four factors determining the growth rate of HTBB$.$

$(6$ marks$)$

$($d$)$ Provide two alternatives of firm valuation in addition to DCF$,$ which WSTB can use to

value HTBB$,$ and discuss their pros and cons.

$(6$ marks$)$