Private Equity Partners, LP (PEP) is considering a leveraged buyout of Specialty Components, Inc. (SCI), a closely held company as an add-on acquisition to its current investment in the industrial components sector. The acquisition price is $10 million. The following information is available for SCI ($ in 000):

FCF year 2014 = $1,500

10 year T Bond Rate = 4%

Market Risk Premium = 5%

Debt equity ratio = 3

Debt ( Bank 9% Notes since bank debt ignore debt beta)

Marginal tax rate =40%

Average unlevered beta for industry peers 1.20

Industry FCF multiple = 6.5

Total assets = 2,940

Total equity = 735

SCI has a competitive advantage in its main component line because of patent protection, which expires in three years. As a result, its growth rate in FCFF is estimated to be 7% during until the patent expires. After that, SCI will grow at the same rate as the overall economy and the capital structure will be stable and the debt equity ratio will be 3.

PEPs bankers have arranged acquisition financing for 90% of the acquisition price of, including taking out the existing debt. The interest rate of the new debt will be 9%. The acquisition debt will remain in place for three years then the debt equity ratio will be reduced to 3 at the end of three years.

Compute Enterprise Valuation for SCI. Since SCIs Capital Structure is fluid, using the Adjusted Present Value Method (APV) for the Planning Periods and use Relative Valuation for Terminal Value with 20% illiquidity discount. The present value of the Terminal Value should be determined using WACC.