1. Green Planet, Inc., a manufacturer of air filter systems for industrial facilities, is considering the addition of a new system to its current product line. The following data has been forecasted: 2018 2019 2020 2021 Depreciation 30,000 35,000 40,000 45,000 EBIT 100,000 125,000 150,000 175,000 Investment in Operating Assets 30,000 35,000 40,000 50,000 The market value of the firm's debt is $300,000, and it has $150,000 in marketable securities. The company also has 10,000 shares of preferred stock that pay an annual dividend of $0.75 per share. Investors require a rate of return of 7% on preferred stocks of similar risk. The firm has 100,000 shares of common stock outstanding, and its weighted average cost of capital is 11%. The expected tax rate is 35% in the next two years and 40% after that. Calculate the free cash flow for each of the next four years. After 2021 the firm's free cash flow is expected to grow at 5% per year indefinitely. What is the value of the stock today? Assume that after 2021 the firm's free cash flow is expected to grow at 9% per year for four years. After that time, the firm's free cash flow will grow at 5% indefinitely. Using the two-stage dividend growth model, what is the value of the stock? Assume that the transition between 9% and 5% will be gradual rather than instantaneous. The forecasted transition period is 3 years. Green Planet, Inc. Free Cash Flow Forecast 2018 2019 2020 2021 Depreciation EBIT Investment in Operating Assets Tax Rate Net Operating Profit After Tax Operating Cash Flow After Tax Free Cash Flow Current Market Value of Debt Non-Operating Assets FCF Growth Rate after 2021 Weighted Average Cost of Capital Common Shares Outstanding Preferred Shares Outstanding Required Return on Preferred Stock Preferred Dividend Per Share Current Price of Preferred Stock Value of Firm's Operations Value of Equity Per Share Value Growth Rate #1 Growth Rate #2 Rapid Growth Period after 2021 Value of Firm Two-Stage (formula) 3 Value of Equity 4 Per Share Value 5 16 Transition Period 37 Three-Stage (formula) 38 Value of Equity 39 Per Share Value 40 42 43