You are reviewing the discounted cash flow valuation of Roland Inc., a publicly traded automobile parts company. The analyst estimated the following numbers for the next 3 years (the high growth period) for the company:

Year Current 1 2 3

EBIT(1-t) $80.00 $92.00 $105.80 $121.67

FCFF $20.00 $23.00 $26.45 $30.42

a. Assuming that the firm will maintain its existing return on capital for the next 3 years and that the analyst estimates of free cash flow and earnings are correct, estimate the return on capital for the firm. (2 points)

b. At the end of year 3, the firm will be in stable growth, with a cost of capital of 10% and an expected growth rate of 4% forever. If the return on capital after year 3 will be 12%, estimate the value of the firm at the end of year 3. ( 2.5 points)

c. The firm currently has a cost of capital of 12% (higher than its stable period cost of capital), a cash balance of $ 50 million and debt outstanding of $ 250 million. If there are 100 million shares outstanding, estimate the value of equity per share today. ( 2.5 points)