Problem 1.

Suppose we are planning to buy a company with the following forecasts:

Year 1 2 3 & afterwards

FCF $5 million $ 5.5 million 3% constant growth rate

Debt level $50 million $35 million Constant debt to equity ratio. Capital will be

50% debt and 50% equity, w_d = w_s = 0.5.

The cost of debt is 5%

The cost of equity is 20%

The tax rate is 40%

The company has 15 million shares outstanding

The current stock price is $2.05

The company is currently holding no financial assets.

The company has $3,000,000 in debt.

WACC, the cost of capital, is equal to 11.5%

RSU, the cost of unlevered equity, is equal to 12.5%

Calculate the value of the target.