The business license was issued by the United States government. These licenses are valuable, but they trade infrequently, and the last separate sale of a similar license was 10 years ago. Similar licenses are sometimes sublicensed, or rented, in exchange for a royalty fee based on total business revenue, so a "relief from royalty" method can be used to estimate the fair value of the license. You have generated the following data: 1, Royalty Rate: 4.0% of total business revenue (before subtracting any expenses) 2. Expected Little Lily revenue in 2009: $15,000,000 3. Expected growth rate in Little Lily revenue each year from 2010 through 2013: 10.0%. You expect rapid Little Lily revenue growth for the next five years, but then the growth will slow to a sustainable long-term level. 4. Expected growth rate in Little Lily revenue each year after five years (2014 and beyond): 3.0% 5. Income Tax Rate: 30% 6. Risk-Free Rate: 6% Discount Rate on License: 13% 7. Assume that all cash flows occur at the end of the year.

Business license. The business license was issued by the United States government. These licenses are valuable, but they trade infrequently, and the last separate sale of a similar license was 10 years ago. Similar licenses are sometimes sublicensed, or rented, in exchange for a royalty fee based on total business revenue, so a \"relief from royalty\" method can be used to estimate the fair value of the license. You have generated the following data. Royalty rate: 4.0% of total business revenue (before subtracting any expenses) Expected Little Lily revenue in 2009: $15,000,000 Expected growth rate in Little Lily revenue each year from 2010 through 2013: 10.0%. You expect rapid Little Lily revenue growth for the next five years, but then the growth will slow to a sustainable long-term level. Expected growth rate in Little Lily revenue each year after five years (2014 and beyond): 3.0% Income tax rate: 30% Assume that all cash flows occur at the end of the year. -----------------------------------------------------------------------------------------------------------------------------Discount rate. You know that when using an expected cash flow approach, the uncertainty of the situation is built into the expected cash flow estimates; the appropriate discount rate to use in such a case is the risk-free rate which is 6.0% in this case. The appropriate discount rate to use in valuating the business license should be a risk-adjusted rate. Given the uncertainty of Little Lily's future revenues, the appropriate discount rate is 13.0%