The Jacob Johnston Company is a privately held business that currently uses no debt in its capital structure. The owner-managers have a plan to expand the operations of the company over the next years. Some of Johnston's older owner-managers think that the company's cash flows could easily support some debt. They hired a consultant who recommended a low risk capital structure strategy financing the company with a constant target capital structure of 20% debt (for debt to firm value r equal to 20%). The consultant told them that with this target capital structure, their interest rate on (and debt cost of capital) would be equal to 8%. Based on the revised capital structure, the older ow managers would pay out all the equity free cash flows as dividends. At the end of Year 3, they expect the company's cash flows will grow at the overall growth rate of 2.5%. The tax rate for all expenses including interest is 40%. The unlevered cost of capital is 12%. 

To do: 

a) Use the financial statements to measure Johnston's unlevered free cash flows in Years 1 through 4. 

b) Value Johnston- the entire firm and its equity using the WACC valuation method and the propose capital structure strategy assuming that interest tax shields are valued at the unlevered cost of capi.