QUESTION 1 (25 MARKS) Assume you are working as a financial manager in a large firm. Your task is to evaluate the potential purchase of a small firm currently generating RM 200,000 of after tax cash flows. On the basis of a review of similar-risk investments opportunities, your risk adjusted required rate of return should be 15%. Using this information you have to suggest the higher management about the potential price they should pay for the small firm. Because you are relatively uncertain about the firm's future cash flows, you decide to estimate the firm's value using several possible assumptions about the growth rate of cash flows. Required A. Estimate the firm's value if cash flows are expected to grow i. At an annual rate of - 4% from now to infinity. (5 marks) ii. At an annual rate of 0% from now to infinity. (5 marks) At an annual rate of 10% for the first 3 years, followed by a constant annual rate of 3% from iii. year 4 to infinity (7 marks) B. Suppose beta of the firm earlier was 1. The risk free rate is 10%. The market rate of return is 15%. Assume the beta has changed to 1.3. Show the effects this beta change will have on the following: i. Required rate of return for the company (4 marks) ii. Value of the firm under assumption (iii) of part a (4 marks)