VALUATION EXERCISE

Place a value on Ritchie Metals, whose headquarters and major sales area are located in the local area. The following information is relevant:

A)Use a 4-year time horizon to forecast free cash flow.

B) Free cash flow in 2010, at the end of the fiscal year, was $964,215 (at fiscal year-end 2004 free cash flow was $658,572.)

C) The compound growth rate of free cash flow is expected to continue up to the horizon period (the terminal year); after which a perpetual growth rate of 2% is likely.

D) Selected capital market data as of 2010 are:

yield on 10-year Treasury securities is 3.5%.

Betas for 6 similar companies average 1.286x;

historical return (10 years) on a broad market average of common stock is 10%.

(Please make certain you show clearly the discount rate, the terminal value, and the total value for the firm.)