You estimate that the free cash flows of a firm will be $5million, $8million, $12million and

$14million over the next four years. You estimate (properly) that the cash flows will grow at 5%

thereafter (and you are comfortable with the steady-state year free cash flow). You have calculated

the cost of equity capital = 15.5% and the pre-tax cost of debt capital = 7%. The average tax rate is

20%, and the marginal tax rate is 40%. The firm is currently operating with a D/E ratio of 1.5, and the

target D/E ratio is 0.80. Calculate the value of the firm.