The company has 1 million common shares outstanding with a total book value of $9 million. Last year, the company paid a dividend of $4 per share. The risk-free rate is 1% and the market risk premium (Rm - Rf) is 8% for the industry. Comparable public companies in the industry have a Beta of 1.7. The firm also has $2.2 million of bonds outstanding with a coupon rate of 7% that are currently trading at 110, with a yield to maturity of 6%. There are no preferred shares and the tax rate is 30%.After the end of 5 years, the company expects that all cash flows will continue to grow at 2.5% per year indefinitely.

(a) A buyer has recently approached the owner and would like to buy the company. What is an appropriate discount rate?

b) What is a fair purchase price for this company? (Round to the nearest million) (c) Suppose the buyer offers to purchase all of the outstanding shares for $25 million. What should the company do? (d) If your answer is different from the acquirer's offer, provide TWO potential reasons to explain why there might be a difference between the two valuations.

Below are selected financial statement projections the owner of PPI Plus Pet Stores has made for his company for the next 5 years. (All values on the income statement are in thousands.) 5 YEAR FORECAST 20Y1 20Y2 20Y3 20Y4 20Y5 Sales/Revenues 48,781 53,659 57,952 62,588 67,595 Cost of Sales/Revenues 31,220 34,342 36,800 39,743 42,923 GROSS PROFIT 17,561 19,317 21,152 22,845 24,672 General & Admin Expense 13,659 14,756 15,647 16,899 18,251 Depreciation 255 239 227 219 213 TOTAL OPERATING EXPENSE 13,914 14,995 15,874 17,118 18,464 EBIT 3,647 4,322 5,278 5,727 6,208 Interest expense 1,300 1,450 1,425 1,366 1,242 PROFIT BEFORE TAXES 2,347 2,872 3,853 4,361 4,966 Income Tax (30%) 704 1,156 1,308 1,490 NET PROFIT 1,643 2,697 3,053 3,476 NET CASH AFTER OPERATIONS 2,316 3,552 3,651 3,954 PROJECTED CAPITAL EXPENDITURES 400 500 515 750 862 2,010 3,445 420