Snapchat, a California based private company, is considering going public and hires you as an advisor to determine the right share price for their IPO. They want to issue exactly 10M shares in exchange for 100% of their equity. Snapchat currently has sales of 50 M$ per year (at t=0), an operating (EBIT) margin of 85% which is expected to remain constant, 10 M$ of outstanding debt and no cash. Because millennials - the primary user group of Snapchat's services - are spending more and more money on mobile applications, Snapchat expects their sales to grow by 10% per year for the next 4 years and grow at a similar pace as the overall economy after this period of strong growth. You expect net working capital to increase by 5% of the sales growth per year. Using sophisticated forecasting models you project depreciation and amortization (D&A) and capital expenditure to be around 3% and 4% per year of sales, respectively. Snapchat's CFO tells you that their weighted average cost of capital (WACC) is 9.5%. The corporate tax rate in California is 35%. A recent study by the IMF forecasts the long-term growth rate of US economy to be around 2% per year in perpetuity. a) You decide to use DCF valuation. What is a fair price per share for Snapchat's equity? (12 marks) b) Depending on the outcome of the US presidential election, the IMF forecasts the economy to either grow at a perpetual rate of 1% or 4% per year. Estimate a range of fair share prices using DCF valuation. (3 marks)