What are the relevant cash flows for valuing Artforever.com? Assume that your

valuation is performed at the end of $2017,$ and that the values shown in Table $1$ are

end$-$of$-$year forecasts.

Forecast Data for Artforever.com $($in $$000)$

$20182019202020212022$

Sales Revenue $1,000\mathrm{.}01,250\mathrm{.}01,875\mathrm{.}02,100\mathrm{.}03,750\mathrm{.}0$

Investment in CapEx and NWC $25\mathrm{.}055\mathrm{.}0170\mathrm{.}080\mathrm{.}080\mathrm{.}0$

Depreciation $15\mathrm{.}030\mathrm{.}050\mathrm{.}072\mathrm{.}080\mathrm{.}0$

Interest payments $94\mathrm{.}4101\mathrm{.}4108\mathrm{.}6115\mathrm{.}9122\mathrm{.}4$

Artforever.com currently has $$1,475,000($market value$)$ in long$-$term debt, with a

coupon rate of $7\%.$ Its cost of goods sold $($COGS$)$ is expected to be $42\%$ of sales

revenues, and selling, general and administrative $($SG&A$)$ expenses are expected to be

$15$ percent of revenues. The depreciation numbers listed above are already included in

COGS percentage estimates. The firm$$s corporate tax rate is $40\%$ and its current cost of

borrowing is $6\mathrm{.}2\%.$

Your research indicates that Artforever has a target debt to value ratio of $15\%,$ based on

its assessment of the probability and costs of financial distress. You note that this is

different from the capital structure of Neuqu$$n and wonder how this would factor into

your analysis.

Although Artforever.com is a rapidly growing company, your analysis of industry

structure suggests that competition in the art restoration market is likely to increase in

the next few years. Thus, you forecast that the perpetual growth rate for free cash flows

beyond $2022$ will be a more modest $2\mathrm{.}0\%$ per year.

Your analysis of market data yielded the information in Table $2$ below.

Market Data

Current yield to maturity on $30$ year treasury bonds $2\mathrm{.}50\%$

Current yield to maturity on $3$ month treasury bills $2\mathrm{.}0\%$

Most recent $1-$year return on the S&P $5005\mathrm{.}3\%$

Estimate of expected average return on the S&P $500$ over the next $30$ years $8\mathrm{.}0\%$

Your analysis of Artforever.com$$s industry reveals that most of the firms in the industry,

like Artforever, are private firms. However, you find a close competitor, ArtToday.net,

that is in the same line of business and is publicly traded. ArtToday has a long$-$term

target debt to equity ratio of $0\mathrm{.}75,$ and has been historically quite close to that target.

Your analysis of ArtToday$$s historical returns against the market returns yields an equity

beta of $1\mathrm{.}5.$ ArtToday currently has $50,000$ common shares outstanding trading at $$12$

per share. Assume that both companies face a similar tax rate.