Joe, after talking to his MBA classmates, realized that his forecast of dividend payout might be too aggressive, and it is by nature very difficult to forecast the dividend of an IPO company due to lack of dividend history. So he decided to try the free cash flow model as a companys free cash flows are not directly affected by dividend policy. He checked his notes from the finance class he took at the business school and understand that the firm's total value can be estimated as the sum of its discounted free cash flows in the future. Free cash flows are estimated by subtracting the firm's net capital spending and the change in net working capital from the year's operating cash flows and are then discounted at the firms overall cost of capital (or weighted average cost of capital). The firm's market value of equity was then calculated by subtracting the firm's outstanding debt owed to creditors (i.e., long-term debt) from the overall firm value. Since their debt is not traded in the market, Joe used the book value of debt. He also noted that current liabilities are not considered as part of capital structure and so are not considered as debt. Joe decided to use the interest rate on their long-term debt to proxy for the cost of debt. To calculate the weighted average cost of capital, he relied on book values of equity and debt in 2014. He continued to use 13.73% as the cost of equity. Questions: 1. Joe first calculated the free cash flows in 2014 and used it as the base to forecast future free cash flows. He used similar assumptions in his dividend discount model and assumed that the firm's free cash flows would grow at a rate of 30% the next year and for another three years, 20% thereafter for two years, and then finally settle down to a long-term growth rate of 6% thereafter. He estimated net capital spending in 2014 as the sum of depreciation in 2014 and the change in fixed asset (from 2013). Based on this approach, what would Citrus Glow's selling prices per share be if they were to issue 30 million shares? 2. Dan looked at Joes assumption, and he thinks Joe is too optimistic about the growth of the company. He suggested Joe try more modest assumptions of the growth rate: 30% during the first year, 20% during the second year, and then settle down to a long-term growth rate of 6% thereafter. Under this assumption, what would be the price per share if everything else stays the same? 3. Are you surprised by the difference between the two estimates under different assumptions? Discuss why or why not. 4. Consider all the three approaches (including the comparables approach and dividend discount model you worked on last time). What is your favorite approach? Why?

Table 1: Key Valuation Ratios for Top 3 Competitors Company A Company B Price/Earnings 23.6 24.6 Price/Sales 2.9 2.8 Dividend Yield % 1.8 1.6 Beta 1.2 1.3 Recent Price $62.47 $57.29 Company C 22.8 2.9 1.7 1.15 $57.30 Table 2: Citrus Glow International's 3-year Income Statements 2012 2013 2014 Revenue 300,250,000 400.150,000 500.000.000 COGS (excluding depreciation) 147,122,500 184,069,000 255,000,000 Gross Profit 153,127,500 216,081,000 245,000,000 Depreciation 4,206,746 7,042,640 9,703,125 Operating Expenses 87,072,500 141,653,100 140,000,000 Earnings Before Interest & Taxes 61,848,254 67,385,260 95,296,875 Interest Expense 1,876,865 5,165,760 8,006,250 Earnings Before Taxes 59,971,389 62,219,500 87.290,625 Income Taxes 23,988,556 24.887,800 34,916,250 Net Income 35,982,833 37,331,700 52,374 375 Table 3: Citrus Glow International's 3-year Balance Sheet 2012 2013 2014 Current Assets 45,573,081 57,621,600 64,687,500 Fixed Assets 42,067,459 70,426,400 97,031,250 Total Assets 87,640,541 128.048,000 161,718,750 Current Liabilities 3,128,108 8,609,600 13,343,750 Long-term Debt 12,512,432 34,438,400 53,375,000 Owners' Equity 72,000,000 85,000,000 95,000,000 Total Liabilities and Owners' Equity 87,640,541 128,048,000 161,718,750 Table 1: Key Valuation Ratios for Top 3 Competitors Company A Company B Price/Earnings 23.6 24.6 Price/Sales 2.9 2.8 Dividend Yield % 1.8 1.6 Beta 1.2 1.3 Recent Price $62.47 $57.29 Company C 22.8 2.9 1.7 1.15 $57.30 Table 2: Citrus Glow International's 3-year Income Statements 2012 2013 2014 Revenue 300,250,000 400.150,000 500.000.000 COGS (excluding depreciation) 147,122,500 184,069,000 255,000,000 Gross Profit 153,127,500 216,081,000 245,000,000 Depreciation 4,206,746 7,042,640 9,703,125 Operating Expenses 87,072,500 141,653,100 140,000,000 Earnings Before Interest & Taxes 61,848,254 67,385,260 95,296,875 Interest Expense 1,876,865 5,165,760 8,006,250 Earnings Before Taxes 59,971,389 62,219,500 87.290,625 Income Taxes 23,988,556 24.887,800 34,916,250 Net Income 35,982,833 37,331,700 52,374 375 Table 3: Citrus Glow International's 3-year Balance Sheet 2012 2013 2014 Current Assets 45,573,081 57,621,600 64,687,500 Fixed Assets 42,067,459 70,426,400 97,031,250 Total Assets 87,640,541 128.048,000 161,718,750 Current Liabilities 3,128,108 8,609,600 13,343,750 Long-term Debt 12,512,432 34,438,400 53,375,000 Owners' Equity 72,000,000 85,000,000 95,000,000 Total Liabilities and Owners' Equity 87,640,541 128,048,000 161,718,750