Question 10. (10 marks) (a) Value Co (Value) has $200 million in debt, with a before-tax cost of debt of 8%. Value has 15 million shares outstanding, with a market price of $20 per share. Values cost of equity can be estimated using the CAPM model and data from comparable firms. Alpha Co (Alpha) and Beta Co (Beta) are equally comparable to Value. Alpha has a levered beta of 1.5 and a debt-to-equity ratio of 100%. Beta has a levered beta of 0.8 and a debt-to-equity ratio of 20%. The risk-free rate is 4% and the market risk premium is 7%. What is Values WACC? (Show your work in Excel. In Excel, show numbers at the two decimal places. Copy-paste your Excel work to your answer document as an image.) (3 marks)

(b) Assume that the information provided about Value in (a) holds here as well. The following are selected items from Values financial statements from the past three years. The dollar amounts in the financial statements are in millions. Today is the last day of year 100.

Regarding these items, Values sales growth is expected to decline by 2 percentage points each year. (For example, Values sales growth in year 101 is expected to be 12%.) This decline in sales growth is expected to continue until sales growth becomes 2%, after which sales growth is expected to stay at 2% in perpetuity. Gross margins and EBIT margins are expected to stay the same in the future. Capital expenditures will stay at 15% of sales, except year 102 and year 103, where it is expected to be 25% of sales due to scheduled replacement in factory equipment. Depreciation will stay at 15% of sales except year 103 and year 104, where it is expected to be 25% of sales. Values working capital consists of accounts receivables, inventories, and accounts payables. Values days sales outstanding, days inventory held, and days payable outstanding is expected to remain constant. The days sales outstanding, days inventory held, and days payable outstanding of a particular year are calculated based only on that years account receivables, inventories, account payables, sales and cost of goods sold. Values tax rate is 40%. Using the discounted cash flow model, estimate the value of Values shares. Should you buy Value shares? (Show your work in Excel. In Excel, show numbers at the two decimal places. Copy-paste your Excel work to your answer document as an image.) (7 marks)

\begin{tabular}{cccc} \multicolumn{4}{c}{ Selected Items from Value's Cash Flow Statement } \\ Year & 98 & 99 & 100 \\ \hline Depreciation & 15.00 & 17.40 & 19.84 \\ \% Sales & 15% & 15% & 15% \\ Capital Expenditures & 15.00 & 17.40 & 19.84 \\ \% Sales & 15% & 15% & 15% \end{tabular} \begin{tabular}{cccc} \multicolumn{4}{c}{ Selected Items from Value's Cash Flow Statement } \\ Year & 98 & 99 & 100 \\ \hline Depreciation & 15.00 & 17.40 & 19.84 \\ \% Sales & 15% & 15% & 15% \\ Capital Expenditures & 15.00 & 17.40 & 19.84 \\ \% Sales & 15% & 15% & 15% \end{tabular}