You are the financial manager of a company with market value of debt $300,000 and equity $700,000. The cost of debt is 5% for your company and cost of equity is 11%. Your company is tempted to acquire Company Z. You want to estimate the value of Company Z. The following table sets out the information that you need to forecast company Zs free cash flows (the highlighted numbers are all forecasted numbers). You can assume the cash flow in year 0 has already occurred when you calculate the value of the business. Value horizon is 2 years. From year 3 onward, you assume a long-term growth rate of 3.5% each year. Company Z has a debt ratio (D/V) of 20% and will keep the debt ratio constant. Assume the cost of debt for company Z is also 5%. Marginal tax rates for both companies are 21%.

	0	1	2	3
Sales	170,000	171,000	172,000	176,000
Cost of goods sold	136,000	136,700	137,500	138,300
Net working capital	100,000	103,800	108,200	112,350
Depreciation	7,000	7,000	7,000	7,000
Gross fixed assets	160,000	175,000	188,000	202,000
Investment in fixed assets (change in gross fixed assets)	13,000
Investment in working capital	4,000

You will use adjust discount rate approach to calculate the value of Company Z (keep four decimals). Show are your inputs to get full credit. Please don't attach your work in excel here, I won't grade it.

(a). Whats the discount rate you will use to discount the free cash flow given that Company Z's debt ratio is different from your company? [9 points]

(b). Forecast Company Zs after-tax profit over the next 3 years. Show your work to derive the after-tax profit in year 2 (dont need to show after-tax profit in year 1 and 3)? [5 points]

(c). Calculate free cash flows over the next 3 years. Specifically, whats the free cash flow in year 2 (dont need to show your work to drive free cash flow in year 1 and 3)? [7 points]

(d). Whats the present value of horizon value? [7 points]

(e). Whats the present value of the firm? [6 points]