IV. Effete Furniture is a furniture conglomerate undergoing restructuring. As part of its restructuring program, Effete is considering the sale of its low growth Driftwood furniture unit. Driftwood's volume sales are expected to decline in the future and its long-term growth of dollar sales was not expected to exceed 3% per year. Effete wants to estimate the price it may get for Driftwood in a private auction of the unit as of the beginning of 2016. Exhibit 1 contains operating projections for Driftwood. Other data are presented in Exhibit 2. Given the uncertainty associated with this evaluation, the CFO of Effete would like to base the estimation on two different valuation approaches. (1) Compute the valuation of the Driftwood unit using a discounted cash flow approach. Hint: You can use the Free Cash Flow approach to conduct this valuation. Exhibit 1. Driftwood Unit - 2016-2020 Projections (millions $) 2016 2017 2015 2018 2019 2020 2,308.0 1.20% Sales Operating marg. EBIT Depreciation CAPEX + WC incr. 2,223.2 1.12% 24.9 2,245.6 1.14% 1.16% 2,284.2 25.6 32.0 32.6 38.2 40.2 34.2 40.0 30.9 30.5 2,550.0 2,616.7 1.20% 1.20% 30.0 30.0 30.0 30.0 Effete estimates that the buyer can finance the acquisition with 45% debt, which can be raised at a 11% rate. The beta of publicly traded companies in the furniture industry with a similar product portfolio as Driftwood and with similar capital structures is 1.33. The yield on long-term government bonds is 7.52% and the equity risk premium over the government rate for small cap firms is estimated at 6%. The firm's corporate tax rate is 40%. (Four points)