Question 2 BABA is a public company with the following characteristics (in the most recent year): - After-tax operating income: $60 million - Revenues: $500 million - Shares outstanding: 100 million - Share price: $4 - The cost of capital for the firm is 12% next year, 11% the year after, and 10% thereafter (in perpetuity). - At the start of the year, the firm had book value of equity of $300 million, debt outstanding (book value as well as market value) of \$200 million, and cash balance of $100 million. These numbers did not change during the most recent year. a) You expect BABA's after-tax operating income to grow 20% in each of the next 3 years, and BABA to maintain its current return on invested capital forever. Estimate the free cash flows to the firm in each of the next 3 years. b) At the end of year 3, you expect BABA to be in stable growth, with its after-tax operating income growing 3% a year in perpetuity, while maintaining its current return on invested capital. Estimate the terminal value at the end of year 3. c) Estimate the total market value of equity today. d) BABA has 20 million options outstanding: i. Given that the option has an exercise price of $5/ share. Using the treasury stock approach, estimate the share price today. ii. If the market value of each option is \$4. Using the "market value approach", estimate the share price today