In December 2018, Steve Baily, the owner of California Coast General Stores announced the highest sales, $50, and profitability of $10 to its employees.

Founded in 1980, California Coast General Stores (CCGS), a regional west coast chain, owns several gas stations, mini-marts, and Auto rentals.

Explaining the original long-term success of the company, a financial analyst commented that the success of the company is due to its sustained growth rate, efficiency and cost savings. As a result, the company is cash rich and is looking to expand its operation.

One of the options that the company considered is to acquire a complementary company. John Marks, the companys CFO and treasurer was asked to find the suitable acquisition. John identified Prestige Auto Shops, a chain which operates in several adjacent States. Prestige is a privately held company managed by three Johnsons brothers. They own 10 million shares of the company and they have priced the stock price of the company internally at $20 per share.

Table-1 indicates Johns estimates of Prestiges earnings potential if it came under CCGSs management (in millions of dollars). The interest expense is based on Prestiges existing debt, which is $20 million at a rate of 8 percent. It is expected new debt at rate of 8% to be issued over time to help finance investment in operating capital.

Security analysts based on comparable companies estimate the Prestiges beta to be 1.28. The acquisition would not change Prestige capital structure, which is 25 percent debt-to value. John realizes that Prestige business plan requires investment in operating capital (net working capital and capital expenditures). The growth rate for operating capital is listed in table (1).

John estimates the risk-free rate to be 3 percent and the market risk premium to be 6 percent. He also estimates that free cash flows after 2023 will grow at a constant rate of 5 percent. Following are projections for sales and other items.

Table -1		Year	2018	2019	2020	2021	2022	2023
Sales growth rate				50%	30%	20%	10%	5%
Net sales			$40
Cost of goods sold	60%		$24
Selling/administrative expense	10%		$4
EBIT			$12
Taxes on EBIT	30%		($3.60)
NOPAT			$8.40
Initial investment in operating capital (NWC +Capex)			$100
Growth in Operating Capital				6%	5%	4%	3%	3%
Interest expense			$1.60

In theory, there are several valuation models. These models are Discounted Cash Flow based on WACC, Cash Flow to Equity (CFE), and Adjusted Present Value (APV) which could be used to estimate the value of a firm.

Questions:

What is the value of Prestige Company?