Question 1 has two parts for a total of 14 minutes. Tom Anderson, Chief Executive Officer of DCom, hires Vala and Associates to provide additional insight into capital markets and corporate finance issues. During the initial meeting in December 2000 with Jim Vala, CFA, Anderson comments: "I do not believe the full value of DCom is reflected in the market price of Jones Group equity. I think DCo s full value can be determined using the free cash flows to the firm model Vala has the following notes from his initial meeting with Anderson. The data communications network was built on existing property alongside Midwest Pipeline's transmission pipelines. The major network construction is nearing completion and DCom's sales force is now in place. Network data traffic is expected to grow at a rate of 50 percent annual ly through 2003 and 15 percent annually thereafter. Beginning in 2004, DCom's free cash flows to the firm are expected to grow at a sustainable rate of 12 percent annually. The weighted average cost of capital for DCom is 15 percent. The appropriate tax rate for DCom is 40 percent. A Calculate the total firm value of DCo at the end of year 2000, using the free cash flows to m the firm (FCFF) model. 10 minutes B) State whether total firm value as determined by the FCFF model is appropriate to assess the value that DCom should contribute to the market price of Jones Group equity. Support your response with one reason. (4 minutes)