In the summer of 2010, smidgeon industries was evaluating whether or not to puchase one of its suppliers. The supplier, carswell manufacturing, provids smidgeon with the raw steel smidgeon uses to fabricate utility trailers. One of the first things that smedgeon's managment did was to forecast the cash flows of carswell for the next five years:

yr cashflow

1 1,200,000

2 1,260,000

3 1,323,000

4 1,389,150

5 1,468,608

Next, smidgeon's management team looked at a group of similar firms and estimated carswell's ost of capital to be 15%. Finally, they estimated that carswell would be worth approximately six time its year 5 flow in five years.

a)what is your estimate of the eterprise value of carswell

b)what is the value of the equity of carswell if the acquisition goes through and smidgeon borrows $2.4 million and finances the remainder using equity