The target is a classic manufacturing company from the Midwest. It is listed on the NYSE, with a current market cap., of $4.30B, and CAPM beta of 1.1; our investment bankers estimate it will take a bid of $5.0B to close the deal.

The company has a very stable business, earning a consistent 12.0% return on invested capital, and reinvesting 30% back into the business each year (measured in a traditional FCFF model); both these are expected to continue at this rate for the foreseeable future. Last year, the company earned pre-tax, pre-interest operating profits of $210M. The companys tax rate over last few years has been 20 to 25% - for last year and the future, the rate is expected to be 20%.

The target currently has debt outstanding of $750M, paying interest at a rate of 7.0%.

As I noted above, I will lead you through this problem step-by-step. I will add additional information as we need it so as not to muddy the water.

Question 1: [We will EVENTUALLY use the relationship V_L = V_U + ., thus, we need to estimate VU. Question 1 is the first step in this process here we will forecast UNLEVERED free cash flow[1] for next year]

1. What is NOPAT for the company for last year?
   1. (Operating Profit) x (1-tax rate)
   2. (210,000,000) x (1 - .20) = 205,800,000
2. What is FCFF for the company for last year?
   1. FCFF = NOPLAT change in invested capital
   2. 205,800,000 0 = 205,800,000
3. Measured at the firm level, what is the estimated long-term growth rate for the company (either of invested capital, NOPAT or FCFF, in our model, these are all the same!)?
4. Estimate FCFF for next year.