1. Vista Inc. is a chemical firm that generated 15 million in after-tax operating income on 1 billion in revenues in the most recent year. At the start of that year, it has book value of equity of 90 million, debt outstanding of 45 million and a cash balance of 15 million. The company has 10 million shares outstanding today and is expected to generate its current return on capital in perpetuity. The companys cost of capital is expected to be 9% for the next 5 years.

1. Vista is expected to grow 15% a year for the next 5 years, while maintaining its current return on capital. Estimate the expected free cash flows to the firm each year for the next 5 years. (20%)
2. Now assume that Vistas stock is trading at 26.85/share and that the market has correctly priced the stock today and shares your views on cash flows (in part a). Estimate the terminal value for Vista (at the end of year 5) that the market is forecasting. (20%)
3. Given the terminal value that you have estimated in part b, estimate the cost on capital that the market expects for Vista in perpetuity, if the growth rate forever, after year 5, is 2.5%. (20%)