You have been asked to review the valuation of a privately-owned family business for an all-equity funded transaction. The analyst who valued the business arrived at a value of $200 million, based upon a cost of equity of 18% and an expected growth rate of 3% a year forever. She has made two mistakes:

• The FCFF was computed without considering the salaries that would need to be paid to family members who work at the firm. You estimate that these salaries would amount to $5 million next year, after taxes.

• The potential buyer is a publicly traded company, whose investors are diversified. You believe that only 30% of the risk in this company is market risk. If the risk-free rate today is 3%, the equity risk premium is 6%, estimate the fair value for the firm in this transaction.