Lizo is a public company with the following characteristics (in the most recent year):

• - At the start of the year, the firm had book value of equity of $400 million, debt outstanding (book value as well as market value) of $200 million, and cash balance of $100 million. These numbers did not change during the most recent year.

• - The cost of capital for the firm is 6% next year, 8% the year after and 9% thereafter (in perpetuity).

• - Shares outstanding: 200 million

• - After-tax operating income: $100 million

• - Revenues: $800 million

  a) Lizos after-tax operating income is expected to grow 20% in each of the next 3 years. You expect Lizo to maintain its current return on invested capital (ROIC) forever. Estimate the free cash flows to the firm in each of the next 3 years.

  (8 marks)

  b) At the end of year 3, you expect Lizo to be in stable growth, growing 5% a year in perpetuity, while maintaining its current return on invested capital. Estimate the terminal value at the end of year 3.

c) Estimate the market value of equity today.

(4 marks)

(4 marks)

d) Lizo has 50 million options outstanding. Assume that the market value of each option is $5. Using the market value approach, estimate the value per share for Lizo today.

(4 marks)