Problem 2.

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

Year	1	2	3 & afterwards
FCF	$7 million	$ 8.5 million	3.5% constant growth rate
Debt level	$75 million	$50 million	Constant debt to equity ratio. Capital will be 50% debt and 50% equity, wd = ws = 0.5.

The cost of debt is 4%

The cost of equity is 25%

The tax rate is 30%

The company has 15 million shares outstanding

The current stock price is $3.05

The company is currently holding no financial assets.

The company has $3,750,000 in debt.

WACC, the cost of capital, is equal to 13.9%

RSU, the cost of unlevered equity, is equal to 14.5%

Calculate the value of the target.