Question 2 (20 points) The private equity firm PEret LLP is planning to buy the cable company Teletech. As usual, it plans to lever up the company and let it reduce the debt during the following years from its cash flows. The partners of the firm attempt to figure out the value of Teletech. a) What is the appropriate method for valuing the firm? Why? (2 points) Teletech is privately held, and you have to derive an adequate discount factor for your valuation from the data of comparable companies. The table below shows the equity beta, the leverage (D/(D+E) ), and the tax rate for three publicly listed companies that can be considered Teletech's industry peers. All of them roll over their current debt, which is fixed and perpetual and can be considered risk-free. b) Compute the unlevered asset betas for the industry peers of Teletech. What is your estimate of the asset beta of Teletech? ( 4 points) If you are not able to compute the average asset beta of the industry, you can use an average asset beta of 0.9. Note that this is not necessarily the correct value. Below, you can find PEret's projection of the income statement of Teletech after the takeover. Moreover, you are provided with supplementary data on debt, working capital and investment. Assume that all cash flows are received at the end of each year. Note that, due to efficiency improvements realized after the takeover, the firm plans to reduce working capital. Teletech is subject to a tax rate of 25%. Due to its leverage, the debt beta of Teletech will be 0.2. The risk-free rate is 4%, and the firm assumes a market risk premium of 5%. c) Compute the free cash flows of the unlevered firm in the years 2021-2023. (8 points) PEret assumes that the risk of the tax shields is roughly the same as that of its debt. It estimates that the free cash flow will grow by 4% in 2024 and the following years, and it plans to let its debt grow at the same rate. d) What is the value of Teletech in the case of a takeover by PEret? What discount rate do you use? Show the discount rate used and the formulas for discounted cash flows and terminal values. ( 6 points)