You want to value Siri, Inc. at the end of 2009. Assume that Siris real risky required rate of return is twelve percent a year. Siris net income in 2009 is $10,000, and you estimated that for the next 3 years (2010-2012) its net income will grow at 15% nominally. Its depreciation remains constant at $10,000 for the next 3 years without new investments. Similarly, its interest expense remains constant at $2,857.14 for the next 3 years. The tax rate is 30%. Further, there will be no changes in net working capital and fixed assets. You are very uncertain about the long-term growth, however. Instead of using the perpetual growth assumption, you therefore assume that at the end of 3 years the firms Net Income over Terminal Value or earnings-to-price ratio will be similar to the industry average of 5.0141%. That is, you figure out Siris terminal value in 2012 or PV(2012) based on the following exit multiple: Net Income (2012) / PV(2012) = 0.050141

Q1 : What is the nominal risky required rate of return if the inflation rate is 3%?

Q2: Estimate the (nominal) free cash flow for 2010, 2011 and 2012.

Q3: What is the terminal value (i.e., horizon/continuation value) of Siri in 2012?

Hint: Your pro-forma income statement contains Net Income for 2012. Using the exit multiple, Net Income (2012) / PV(2012) = 0.050141, you will be able to find the firms continuation value in 2012.

Q4: Using the Discounted Cash Flow (DCF) method, calculate the Enterprise Value of Siri in 2009 based on your projections.

Q5: If Siris debt in 2009 is $175,000, what is its Equity Value? Assume that the excess cash balance is equal to the free cash flow in 2009.

Q6: If Siri has 20,000 shares outstanding, what is its stock price?