In the problems following, use an equity risk premium of 5.5 percent if none is specified.

1. You are valuing GenFlex, a small manufacturing firm, which reported paying taxes of $12.5 million on taxable income of $50 million and reinvesting $15 million in the most recent year. The firm has no debt outstanding, the cost of capital is 11%, and the marginal tax rate for the firm is 35%. Assuming that the firms earnings and reinvestment are expected to grow 10% a year for three years and 5% a year forever after that, estimate the value of this firm:

A)Using the effective tax rate to estimate after-tax operating income.

B)Using the marginal tax rate to estimate after-tax operating income.

C)Using the effective tax rate for the next three years and the marginal tax rate in year 4.