Question 1 (answer all parts) You are an equity analyst valuing Edinburgh plc. It is a growth company and is not planning to pay dividends for some years, since it will reinvest all its retained earnings back into the business instead of paying dividends in its early years. You decide to use a Discounted Free Cash Flow model to value Edinburgh plc. You forecast that it will have free cash flow of 5 million one year from now (t=1), which will grow by 6% per year thereafter over the next 9 years, up to and including the free cash flow in ten years' time (t = 10), in a high growth stage. After this, you forecast that the free cash flow will grow at 1% afterwards (forever), in a low growth stage. The firm's Weighted Average Cost of Capital (WACC) is estimated to be 11%. a. Using the above information, work out the terminal Enterprise Value of the low growth stage free cash flows, at the start of the low growth stage, evaluated in ten years' time (i.e. at t = 10) (10 marks) b. Next, work out the present value of this Terminal Value, evaluated at the present time (i.e. at t = 0). (5 marks) c. Calculate the Enterprise Value of the free cash flows of the high growth stage, evaluated at the present time (i.e. at t = 0). (10 marks) Edinburgh plc has just been through a round of fundraising, and so has a lot of cash on its balance sheet. It has total debt of 2 million, total cash of 42 million, and 1 million shares in issue. d. Work out the Equity Value per share of Edinburgh plc at the present time (i.e. at t=0), using this information. (6 marks) e. You forecast that Edinburgh plc will pay an annual dividend for the first time in ten years' time. Would you consider valuing Edinburgh plc using a Dividend Discount Model? Why? (4 marks) (TOTAL 35 marks)