You are assigned to estimate the firm value of Running Watch based in Boston. This firm is financed 60% by equity and 40% by debt. Its cost of equity is 15%, its debt yields 5%, and it pays corporate tax at 35%.

You also have the following year-end forecasts (in million $) of the firms EBITDA, Depreciation and of its future investments in new watch and working capital:

	Year 1	Year 2	Year 3	Year 4
Earnings before interest, taxes, depreciation, and amortization (EBITDA)	80	100	115	120
Depreciation	20	30	35	40
Investment	12	15	18	20

1. Briefly explain the concept of weighted-average cost of capital (WACC). What is this firm's after-tax WACC? [5 Marks]

2. What are the free cash flows generated by this firm from year 1 to year 4? [8 Marks]

3. Calculate the companys total value and the separate values of its debt and equity. Assume that from year 4 onward, EBITDA, depreciation, and investment are expected to remain unchanged at year-4 levels. [12 Marks]