You have been following a company in the news, RC Incorporated, which sells kombucha tea online. You are considering investing in the company; but before you risk any of your money, you decide to estimate the valuation of the stock to determine what would be a reasonable price to pay per share. To help in your valuation, you have assembled the following information for the most recent fiscal year (which ended today):

- RC Incorporated has no debt

- Revenue was $2M

- Gross margins were 35%

- Depreciation was $100,000

- Tax rate is 30%

- Total CAPEX was $150,000

- Net Working Capital Increased by $20,000

- The company has 300,000 shares outstanding

- Return on Equity was 12%

- Dividend payout is 50% of earnings

From your research, the appropriate discount rate for the cash-flows is 10%.

(a) RC has been growing rapidly, but competition is intensifying. As a first guess, you assume that the company will be able to hold onto its competitive advantage and grow its FCF by 15% for the next 5 years, after which the competition will catch up and FCF growth rate will drop to 3%, in perpetuity. Using a DCF valuation method, estimate the price of a share of RC under these assumptions.

(b) Provide another estimate of the growth rate of earnings using the information in the financial statements. Assuming that free-cashflows will grow at this constant rate forever, provide an estimate of the price of a share of RC under these new assumptions. 3

(c) Using the growth rate computed in part (b), provide a third estimate for the price of a share using a discounted dividend approach instead. (Note: there is no debt, so Earnings = EBIAT)