'v'alue Clarkson Lumber at December 31, 15951 assuming the rm will obtain a credit line at Northwestern National Bank sufciently large to take advantage of discounts on purchases for paying within 10! days of invoice, thus increasing operating prot margins. With higher markups and continued operating expense controls, Clarkson projects a steady operating profit margin of 5% by 2900 after which he expects the sales growth rate to drop to a fairly steady 5% per yea r. Margins and investment requirements will also stabilize in relation to sales growth. Relevant projection inputs are in the table below. The discount rate is 11.5%. Note that the forecast ratios already include the benet of the 2% trade discounts. For simplicity, use a tax rate of 35% throughout the projections, i.e., disregard the tax schedule in note {c} to Exhibit 1. All notes payable on Clarkson's balance sheet are interestbearing liabilities. Make whatever other reasonable assumptions are necessary to complete your analysis and explain the rationale for each. Assignment Questions 1. Project free cash flows for the next five years, 19962000. Estimate the residual value at the end of year 5 using both the perpetuity with growth and competitive markets [PVGO = ) assumptions. For the perpetuity with growth formula, you need to gure out the year T when FCF growth stabilizes.2 Use the same year T to compute the residual value using the competitive markets approach. 2. Value the entire company using both residual value estimates. What is Mr. Clarkson's equity interest worth? Which of the two valuations do you think is the most reasonable? Justify your answer 3. Using your valuation for Clarkson at the end of 1995, compute the following multiples