Tom Jones, an equity portfolio manager at a wealth management company, meets with his research analyst James Lang to discuss potential investments in three companies: Sykes Limited, Justin Manufacturing, and Bernard Pharma.

Jones and Lang review key financial data from Sykess most recent annual report, which are presented in Exhibits 1 and 2, to assess the companys ability to generate free cash flow.

Exhibit 1: Selected Data from Sykess Statement of Income for the Year Ended December 31, 2016 (Amounts in Millions of $)

EBITDA	4,000
Depreciation expense	800
Operating income (EBIT)	3,200
Interest expense	440
Tax rate	35%

Exhibit 2: Sykess Statement of Cash Flows for the Year Ended December 31, 2016 (Amounts in Millions of $)

Cash flow from operations
Net income	1,794
Plus: Depreciation	800
Increase in accounts receivable	(2,000)
Increase in inventory	(200)
Increase in accounts payable	1,000
Cash flow from operations	1,394
Cash flow from investing activities
Purchases of PP&E	(1,000)
Cash flow from financing activities
Borrowing (repayment)	500
Total cash flow	894

Jones and Lang next analyze Justin Manufacturing. Last year, Justin had FCFF of $140 million. Jones instructs Lang to perform a FCFF sensitivity analysis of Justins firm value using the three sets of estimates presented in Exhibit 3. In his analysis, Lang assumes a tax rate of 35% and a stable capital structure of 30% debt and 70% equity.

Exhibit 3Sensitivity Analysis for Colanari Valuation

Variable	Base-Case Estimate	Low Estimate	High Estimate
FCFF growth rate	4.6%	4.2%	5.0%
Before-tax cost of debt	4.9%	3.9%	5.9%
Cost of equity	11.0%	10.0%	12.0%

Finally, Jones and Lang analyze Bernard Pharm. Selected financial information on Bernard Pharma is presented in Exhibit 4.

Exhibit 4Selected Financial Data on Bernard Pharma

	Market Value	Required Return
Debt	15,400 million	6.0%
Preferred stock	4,000 million	5.5%
Common stock	18,100 million	11.0%
FCFF, most recent year	3,226 million
Corporate tax rate	26.9%

Jones notes that Bernard has two new drugs that are currently in clinical trials awaiting regulatory approval. In addition to its operating assets, Bernard owns a parcel of land from a decommissioned manufacturing facility with a current market value of $50 million that is being held for investment. Jones and Lang elect to value Bernard Pharmaunder two scenarios:

Scenario 1: Value Bernard Phama assuming the two new drugs receive regulatory approval. In this scenario, FCFF is forecast to grow at 4.5% into perpetuity.

Scenario 2: Value Bernard Pharma assuming the two new drugs do not receive regulatory approval. In this scenario, FCFF is forecast using a stable growth in FCFF of 1.5% for the next three years and then 0.75% thereafter into perpetuity.

Based on Exhibits 1 and 2, Sykess FCFF (in $ millions) in 2016 is:

Based on Exhibit 3, the range of firm values (in $million, difference between high and low) use Langs FCFF analysis for variation in Justin Manufacturings cost of equity is:

Based on Exhibit 3, the range of firm values (in $ millions) use Langs FCFF analysis for variation in Justin Manufacturings FCFF growth rate is:

Based on Exhibit 4, Bernard Pharmas cost of capital is approximately:

Based on Exhibit 4, Bernard Pharmas firm value under Scenario 1 is closest to

Based on Exhibit 4, Jones and Lang should conclude that under Scenario 2, the value of Bernard Pharma shares (market cap) is: