SNAP Camera, Inc. wants to acquire a company called Color-Me-Red. Your assignment is to value Color-Me-Red.

Color-Me-Red sales revenues are projected to be $300 million in year 1, $400 million in year 2, $900 million in year 3, $1,200 million in year 4, and $1,400 in year 5. Costs of goods sold(COGS) are a constant 65% of sales revenues. In year 1, Color-Me-Red selling, general and administrative (SG&A) expenses are projected to be $100 million and are expected stay constant forever. No changes in working capital are expected. Assume that Color-Me-Red's free cash flows grow at a constant rate of g=2% after year 5 (i.e., free cash flows in year 6 = free cash flows in year 5 * (1 + g)).

Assume Color-Me-Red's assets are depreciated using straight-line depreciation over 50 years. Capital expenditures in year t will be depreciated for the first time in year t+ 1. Existing assets have a current (t= 0) book value of $100 million and have a remaining life of 25 years.Capital expenditures over the next five years are expected to be $110 million in year 1, $100 million in year 2, $70 million in year 3, $20 million in year 4, and $10 million in year 5. Salvage values are zero.

The acquisition is expected to generate synergies with a present value of $480 million.

For your analytical purposes, SNAP Camera and Color-Me-Red both finance 40% of their assets with debt and the debt-equity ratio remains constant over time. Other assumptions you should work with are: (1) the risk-free rate is 3.35%, (2) the market risk premium is 5%, (3) the marginal tax rate for both SNAP Camera and Color -Me-Red is 20%, (4) there are 200 million shares of Color-Me-Red outstanding, and (5) all cash flows occur at the end of the year.

Answer the following questions, and if necessary, carefully state any additional assumptions that you make in order to solve the questions:

Question 3: Calculate the Enterprise Value of Color-Me-Red on a Stand Alone Basis

1. Calculate the present value of the annual stand-alone free cash flows from Color-Me-Red in each of years 1 to 5.
2. Calculate the present value of the terminal value of Color-Me-Red.
3. Calculate the discounted cash flows for Color-Me-Red on a stand-alone basis.
4. Calculate the implied share price of Color-Me-Red as a stand-alone firm.

Question 4: Calculate the present value of the Cash Flows for Color-Me-Red as part of SNAP Camera

1. Calculate the present value of Color-Me-Red as part of SNAP Camera.