The business was established as an entrepreneurial venture in 2005 and by 2010 revenue reached $58.0 million. JA Ventures has a unique focus it specializes in homeopathic medicine (accounting for about 75 percent of the companys revenue), vitamins (10 percent of revenue), and dietary supplements (15 percent); the remaining 10 percent of revenue comes from a wide range of other products. The firm sources products from leading international suppliers such as Heel (Germany), Boiron (France), Genestra Brands (USA), and Swiss Herbal (Switzerland). The pharmaceutical sector for alternative medicine in Ontario is highly fragmented and is just beginning to consolidate. Only a few pharmacy chains have focused on this unique product offering, and JA Ventures is a clear market leader with 18 pharmacies in the province. Managements projections assume that JA Ventures is expected to make three investments in fixed assets to expand its operation; this was to occur in 2011. This effort was expected to further solidify the firms position in Ontario and serve as a springboard for further expansion into neighboring provinces (Manitoba and Quebec). Tables 1 and 2 on the following pages present the income statement and a balance sheet for JA Ventures. The statements present the historical financial numbers (2007 to 2010) and the projected financial forecasts (2011 to 2015). Table 3 provides averages of betas for different industries. Table 4 includes selected industry averages. Please assume that the market risk premium is equal to 15% and that the 60-day Treasury bill rate is equal to 5.5%.

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Calculate the net market value of common equity for JA Ventures. Lets assume that for valuation purposes, we are at the beginning of January, 2011.

Hint: a starting point of the valuation is calculation of free cash flows.

Historical 2010 2011 2012 Forecast 2013 2014 2015 33,859 13.919 ($ 000) Assets Current assets: Cash Accounts receivable Inventory Total current assets Fixed assets, gross Less: Accumulated depreciation Fixed assets, net Total Assets 1,618 5,536 19,297 26,451 8,366 1,447 6,919 33,370 1,585 6,977 21,965 30,527 18,366 3.283 15,082 45,609 4,897 9,524 24,730 39.151 18,366 5,120 13,246 52,397 15,173 11.078 25,856 52.107 18,366 6,956 11,409 63,517 24,133 12,517 29,327 65,977 18366 8,793 9,573 75,550 80,641 18,366 10,629 7,736 88,377 Liabilities and Shareholders' Equity Current liabilities: Accounts payable Total current liabilities Long term debt Total liabilities 29,327 29,327 32.863 32,863 12,130 12,130 16,991 29,121 16,474 16.474 11,991 28,464 22.257 22,257 257 6,991 29,247 25,856 25 osc 25,856 6,991 32,847 36,318 39,853 Shareholders' Equity: Common shares Retained earings Total shareholders' equity Total liabilities and shareholders' equity 500 3,750 4,250 10.500 6,646 17,146 45,610 10.500 12.649 23,149 52.397 10.500 2 0,170 30,670 63.517 10.500 28,733 39,233 75.550 10.500 38,024 48,524 88.377 ($ 000) Historic 2008 2007 2009 2010 2011 2012 Projected 2013 2014 2015 Revenue Cost of goods sold Gross profit 3,489 2.871 618 7,210 5,876 1,334 23,734 18,726 5,008 57,994 45,757 12,237 84,891 115,872 66,80990,264 18.082 25,608 134,783 104,861 29,922 152,289 118,938 33,351 169,348 133,277 36,071 262 9 Selling cost General and administrative expenses Other expenses Eamings before interest, taxes, depreciation, and amortization (EBITDA) 361 187 167 1,780 475 17 4.398 1,063 158 6,027 2.547 1.698 7.879 3.360 2.202 .435 3,774 .426 10,203 4.416 2.817 11,346 4,572 3.099 2 155 619 2,582 6,618 7,810 12,167 14,287 15,914 17,053 5 Depreciation Operating profit (EBIT) Interest expense Eamings before taxes (EBT) Taxes @ 36% Net profit (los) 180 -25 90 -115 0 -115 180 439 180 259 93 166 250 2.332 180 2,152 775 1,377 837 ,781 940 ,842 1,743 3,099 1.837 1.837 1,837 1,837 5.973 10,330 12,450 14,078 1,449949699699 4.524 9.381 11,751 13,379 1,6293,377 4,2314,816 2.896 6,004 7,521 8.562 1,837 15,217 699 14,518 5,226 .291 4 9 Table 3 Average betas for specific industries for the period between 2000 and 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Average Standard deviation 0.76 0.88 0.99 0.80 1.15 1.03 0.80 1.04 0.87 1.57 1.07 1.79 1.30 0.93 Apparel Automotive Building materials Drug? Educational services Electric services Information services Internet Medical services Pharmacy services Precious metals Railroad Retail Telecom services Thrift stores Tobacco Trucking 2.72 0.82 0.89 0.85 0.90 0.84 0.53 1.10 2.57 0.85 0.81 0.42 0.77 1.03 1.45 0.78 0.59 0.86 0.86 0.95 0.83 1.04 0.90 0.54 1.13 2.50 0.84 0.92 0.40 0.76 0.92 1.59 0.72 0.60 0.89 0.91 1.06 0.84 1.14 1.16 0.73 1.10 2.47 0.87 0.90 0.38 0.82 0.96 1.62 0.67 0.71 0.86 1.08 0.74 1.30 1.10 0.76 0.94 2.63 0.82 0.78 0.41 0.67 0.97 1.32 0.48 0.59 0.78 0.90 1.23 0.96 1.59 1.09 0.81 0.86 2.78 0.96 0.81 0.67 0.73 0.99 1.69 0.49 0.66 0.88 0.82 0.89 0.41 0.83 0.91 1.35 0.57 0.93 1.29 0.98 1.59 1.09 0.94 1.01 2.30 0.94 0.93 0.90 0.96 0.94 1.43 0.56 0.79 0.98 1.14 1.51 1.39 1.17 0.84 0.82 1.24 1.41 1.10 0.94 1.41 1.26 1.01 1.43 0.66 1.06 1.97 1.10 1.12 1.11 1.23 1.12 1.34 0.59 0.70 1.04 1.30 1.72 1.45 1.11 0.75 0.79 1.28 1.04 0.97 0.88 1.18 1.29 1.35 1.10 0.73 0.78 1.30 0.97 1.26 1.02 1.26 0.99 0.77 1.08 2.14 0.92 0.90 0.77 0.96 1.05 1.35 1.53 1.32 1.11 0.81 0.78 1.10 1.11 0.88 0.95 1.18 1.20 1.36 1.01 0.70 0.73 1.20 0.20 0.29 0.25 0.28 0.17 0.13 0.12 0.65 0.10 0.09 0.39 0.24 0.16 0.21 0.10 0.07 0.17 1.39 0.67 0.71 0.63 0.68 0.98 0.83 1.17 20 Table 4 - Selected industry averages in the pharmacy services industry. EBIT Net profit margin Debt / equity ratio TIE ROE Quick ratio 10.2 percent 7.2 percent 75.3 percent 4.5 10.1 percent 1.2 Historical 2010 2011 2012 Forecast 2013 2014 2015 33,859 13.919 ($ 000) Assets Current assets: Cash Accounts receivable Inventory Total current assets Fixed assets, gross Less: Accumulated depreciation Fixed assets, net Total Assets 1,618 5,536 19,297 26,451 8,366 1,447 6,919 33,370 1,585 6,977 21,965 30,527 18,366 3.283 15,082 45,609 4,897 9,524 24,730 39.151 18,366 5,120 13,246 52,397 15,173 11.078 25,856 52.107 18,366 6,956 11,409 63,517 24,133 12,517 29,327 65,977 18366 8,793 9,573 75,550 80,641 18,366 10,629 7,736 88,377 Liabilities and Shareholders' Equity Current liabilities: Accounts payable Total current liabilities Long term debt Total liabilities 29,327 29,327 32.863 32,863 12,130 12,130 16,991 29,121 16,474 16.474 11,991 28,464 22.257 22,257 257 6,991 29,247 25,856 25 osc 25,856 6,991 32,847 36,318 39,853 Shareholders' Equity: Common shares Retained earings Total shareholders' equity Total liabilities and shareholders' equity 500 3,750 4,250 10.500 6,646 17,146 45,610 10.500 12.649 23,149 52.397 10.500 2 0,170 30,670 63.517 10.500 28,733 39,233 75.550 10.500 38,024 48,524 88.377 ($ 000) Historic 2008 2007 2009 2010 2011 2012 Projected 2013 2014 2015 Revenue Cost of goods sold Gross profit 3,489 2.871 618 7,210 5,876 1,334 23,734 18,726 5,008 57,994 45,757 12,237 84,891 115,872 66,80990,264 18.082 25,608 134,783 104,861 29,922 152,289 118,938 33,351 169,348 133,277 36,071 262 9 Selling cost General and administrative expenses Other expenses Eamings before interest, taxes, depreciation, and amortization (EBITDA) 361 187 167 1,780 475 17 4.398 1,063 158 6,027 2.547 1.698 7.879 3.360 2.202 .435 3,774 .426 10,203 4.416 2.817 11,346 4,572 3.099 2 155 619 2,582 6,618 7,810 12,167 14,287 15,914 17,053 5 Depreciation Operating profit (EBIT) Interest expense Eamings before taxes (EBT) Taxes @ 36% Net profit (los) 180 -25 90 -115 0 -115 180 439 180 259 93 166 250 2.332 180 2,152 775 1,377 837 ,781 940 ,842 1,743 3,099 1.837 1.837 1,837 1,837 5.973 10,330 12,450 14,078 1,449949699699 4.524 9.381 11,751 13,379 1,6293,377 4,2314,816 2.896 6,004 7,521 8.562 1,837 15,217 699 14,518 5,226 .291 4 9 Table 3 Average betas for specific industries for the period between 2000 and 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Average Standard deviation 0.76 0.88 0.99 0.80 1.15 1.03 0.80 1.04 0.87 1.57 1.07 1.79 1.30 0.93 Apparel Automotive Building materials Drug? Educational services Electric services Information services Internet Medical services Pharmacy services Precious metals Railroad Retail Telecom services Thrift stores Tobacco Trucking 2.72 0.82 0.89 0.85 0.90 0.84 0.53 1.10 2.57 0.85 0.81 0.42 0.77 1.03 1.45 0.78 0.59 0.86 0.86 0.95 0.83 1.04 0.90 0.54 1.13 2.50 0.84 0.92 0.40 0.76 0.92 1.59 0.72 0.60 0.89 0.91 1.06 0.84 1.14 1.16 0.73 1.10 2.47 0.87 0.90 0.38 0.82 0.96 1.62 0.67 0.71 0.86 1.08 0.74 1.30 1.10 0.76 0.94 2.63 0.82 0.78 0.41 0.67 0.97 1.32 0.48 0.59 0.78 0.90 1.23 0.96 1.59 1.09 0.81 0.86 2.78 0.96 0.81 0.67 0.73 0.99 1.69 0.49 0.66 0.88 0.82 0.89 0.41 0.83 0.91 1.35 0.57 0.93 1.29 0.98 1.59 1.09 0.94 1.01 2.30 0.94 0.93 0.90 0.96 0.94 1.43 0.56 0.79 0.98 1.14 1.51 1.39 1.17 0.84 0.82 1.24 1.41 1.10 0.94 1.41 1.26 1.01 1.43 0.66 1.06 1.97 1.10 1.12 1.11 1.23 1.12 1.34 0.59 0.70 1.04 1.30 1.72 1.45 1.11 0.75 0.79 1.28 1.04 0.97 0.88 1.18 1.29 1.35 1.10 0.73 0.78 1.30 0.97 1.26 1.02 1.26 0.99 0.77 1.08 2.14 0.92 0.90 0.77 0.96 1.05 1.35 1.53 1.32 1.11 0.81 0.78 1.10 1.11 0.88 0.95 1.18 1.20 1.36 1.01 0.70 0.73 1.20 0.20 0.29 0.25 0.28 0.17 0.13 0.12 0.65 0.10 0.09 0.39 0.24 0.16 0.21 0.10 0.07 0.17 1.39 0.67 0.71 0.63 0.68 0.98 0.83 1.17 20 Table 4 - Selected industry averages in the pharmacy services industry. EBIT Net profit margin Debt / equity ratio TIE ROE Quick ratio 10.2 percent 7.2 percent 75.3 percent 4.5 10.1 percent 1.2