Problem 3 Estimated Value of private firm EBIT (1-t) next year Return on Capital Constant growth Risk free rate Equity Risk Premium Average R Reinvestment rate = FCFF next year = Cost of capital Cost of equity Total beta (from cost of capital above) Market beta Cost of equity for publicly traded Correct value of the firm $2,000 $300 15% 3% 4% 5% 0.25 3. You are reviewing the valuation of Vulcan Enterprises, a private business. The analyst has estimated a value of $ 2.0 million for the company, which is in stable growth and expected to grow 3% a year in perpetuity. The firm has no debt outstanding and is expected to generate an after-tax operating income of $300,000 next year; the return on capital is anticipated to be 15%. The analyst valued the company for a private-to-private transaction, and the cost of equity he estimated is correct, given that setting. (He used a total beta to estimate the cost of equity, a risk-free rate of 4%, and an equity risk premium of 5%). However, the buyer is a publicly-traded firm with diversified investors. The average R-squared across publicly traded companies in this business is 25%. Estimate the correctvalue of Vulcan Enterprises for sale to a public buyer. (40 points) Problem 3 Estimated Value of private firm EBIT (1-t) next year Return on Capital Constant growth Risk free rate Equity Risk Premium Average R Reinvestment rate = FCFF next year = Cost of capital Cost of equity Total beta (from cost of capital above) Market beta Cost of equity for publicly traded Correct value of the firm $2,000 $300 15% 3% 4% 5% 0.25 3. You are reviewing the valuation of Vulcan Enterprises, a private business. The analyst has estimated a value of $ 2.0 million for the company, which is in stable growth and expected to grow 3% a year in perpetuity. The firm has no debt outstanding and is expected to generate an after-tax operating income of $300,000 next year; the return on capital is anticipated to be 15%. The analyst valued the company for a private-to-private transaction, and the cost of equity he estimated is correct, given that setting. (He used a total beta to estimate the cost of equity, a risk-free rate of 4%, and an equity risk premium of 5%). However, the buyer is a publicly-traded firm with diversified investors. The average R-squared across publicly traded companies in this business is 25%. Estimate the correctvalue of Vulcan Enterprises for sale to a public buyer. (40 points)