Pampa RV$,$ Inc., a publicly traded firm, is considering the acquisition of Chico Clothing Company $($CCC$)$ for a price of $$12$ per share. CCC is a private company that specializes in manufacturing clothing, shoes and accessories for beauty pageant contestants. The RV business is slow, and Pampa$$s CFO believes that the acquisition of CCC will help to improve overall profitability and provide much needed cash flow. Pampa$$s has $500,000$ shares of common stock outstanding, currently trading at $$9\mathrm{.}75$ per share. The book value ofthe common stock is $$5$ per share. Pampa also has bonds with a market value of $$3,500,000$ and a yield to maturity of $3\mathrm{.}4\%.$ Based on current market valuations, Pampa is currently achieving its target debt to equity ratio. Pampa$$s equity beta is $0\mathrm{.}80.$CCC is a private firm that was founded ten years ago by four sisters, who have a combined $100$ years of experience in the beauty pageant business as competitors, judges, and coaches. CCC$$s cost of goods sold $($COGS$)$ is expected to be $38\%$ of sales revenues, and selling, general and administrative $($SG&A$)$ expenses are expected to be $12\%$ of revenues. These

estimates are in line with the firm$$s historical performance, which is expected to continue for the foreseeable future. The firm is $100\%$ equity financed and has $100,000$ shares of common stock outstanding. Its equity beta is estimated to be $1\mathrm{.}353.$CCC has experienced rapid growth over the last ten years. However, your analysis of industry structure suggests that competition in the beauty pageant clothing and accessories market is likely to increase in the next few years. Thus, you forecast that the perpetual growth rate for free cash flows after five years will be a modest $1\mathrm{.}5\%$ per year. Your team has been hired as consultants to Pampa RV to evaluate the proposed acquisition of CCC$.$ Tables $1$ and $2$ below contain additional data that you have collected during your research. The corporate tax rate is $40\%$ for all firms.

Forecast Data for Chico Clothing Company

Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

Sales Revenue $300,000335,000375,000410,000575,000$

Investment in CapEx and NWC $18,00025,00040,00050,00065,000$

Depreciation$115,00030,00040,00052,00060,000$

The depreciation numbers listed above are not included in COGS percentage estimates.

Market Data

Current yield to maturity on $30$ year treasury bonds $2\mathrm{.}50\%$

Estimate of expected average return on the S&P $500$ over the next $30$ years $7\mathrm{.}50$

$1.$ What are the Yearly Free Cash Flows for years $1-5?$

$2.$ What is the Terminal Value in year $5?$

$3.$ What is the Total Cash Flow?

$4.$ If the number of outstanding shares is $100,000$ what is the price per share?