Your company, TS&S Inc., has decided to enter the seafood industry, and is considering buying FreshFish, Inc., a procurer and distributor of fresh seafood, located in Cabo San Lucas, Mexico. FreshFish Inc.s financial statements follow:

	12/31/21			Y/E 12/31/21
NWC	400,000		Sales	4,000,000
Net PP&E	1,600,000		Cost of Sales	3,000,000
Total Assets	2,000,000		Gross Profit	1,000,000
			Operating Expenses	400,000
Long-term Debt	500,000		EBIT	600,000
Equity	1,500,000		Interest	50,000
Total Debt & Equity	2,000,000		EBT	550,000
			Tax (30%)	165,000
			Net Income	385,000

In addition, you have collected the following information about FreshFish and two comparable firms:

	FresherFish, Inc.	FreshestFish, Inc.	FreshFish, Inc.
5-yr sales growth/year	11.5%	11.0%	10.0%
5-yr earnings growth/year	13%	12.8%	12.0%
ROE	24%	25%
D/E (Market)	0.35	0.30
Beta	1.2	1.2
Net Margin	11.0%	12.0%
Multiples
Mkt/Book(equity)	6.0	6.0
P/E	15.0	16.0
P/Sales	1.6	1.7

In addition, you are provided with the following information:

Projected NWC = 10% of sales (same as industry)

Projected net capital spending = 5% of sales (same as industry)

Sales are expected to grow by 20% annually for two years, and 4% thereafter

The operating margin is expected to remain the same as last years

R_d = 6.0%

The current risk-free rate is 3.5% and the market risk premium is 5%.

For purposes of determining the cost of capital only assume the market value of equity is approximately equal to the book value of equity

With the information provided above, estimate the value of FreshFish, Inc.s equity as of the end of 2021 using:

A discounted cash flow approach

Calculate WACC

Re = Rf + b*(Rm - Rf)

= 3.5% + 1.2(5%)

= 10.1%

WACC = Rd * (1 - t) * D/(D + E) + Re * E/(D + E)

= 6% * (1 - 0.3) * 0.35/(0.35 + 1.5) + 10.1% * 1.5/(0.35 + 1.5)

= 5.55%

Calculate FCFs, TV and value of the firm and equity

	2022	2023	2024
Sales
NWC
EBIT
Tax
- NWC
- Net Capex
FCF
TV
Firm Value
Equity Value

Potentially Useful Formulas:

Re = R_f + b*(R_m - R_f) R_f = Risk free rate; (R_m - R_f) = Market premium

Re = D1/Po + g

V_t = CF_t+1/(R g) (Constant perpetual growth model)

FCF (free cash flow):

= EBIT *(1 t) + Depreciation NWC Capital Spending

ROE = Net Income/Equity; Net Margin = Net Income/Sales

WACC = R_d * (1 t) * D/(D + E) + R_e * E/(D + E)

B_l = B_u*(1 + D/E)