You have been asked to value LoraLee enterprises, a privately held restaurant chain that is expected to make an initial public offering in five years. You have been provided with the following information: The firm generated after-tax operating income of $ 10 million on revenues of $100 million in the most recent year. The firm is all equity funded, with all equity held by venture capitalists, and the book value of equity at the start of the most recent year was $ 50 million. The unlevered beta for publicly traded firms in the sector is 1.00; the correlation of correlation of the venture capitalists portfolios with the market is 80%. The riskfree rate is 3% and the equity risk premium is 5%

a. If you expect that after-tax operating income will grow 10% a year for the next 5 years and that the firm will maintain its current return on capital, estimate the expected cash flows each year for the next 5 years.

b. At the end of year 5, the firm plans to go public. It plans to remain all equity funded and the return on capital will be 12% in perpetuity, after year 5. If the firm will be in stable growth, growing 3% a year after year 5, estimate the value at the end of year 5.

c. Estimate the value of the Firm to venture capitalist.