The Prodave Paint Company earned a net profit margin of 20% on revenues of $20 million this year. Fixed capital investment was $2 million, and depreciation was $3 million. Working capital investment equals 7.5% of the sales level in that year. Net income, fixed capital investment, depreciation, interest expense, and sales are expected to grow at 10% per year for the next five years. After five years, the growth in sales, net income, depreciation and interest expense will decline to a stable 5% per year, and fixed capital investment and depreciation will offset each other. The tax rate is 40%, and Prodave has 1 million shares of common stock outstanding and long-term debt paying 12.5% interest trading at its par value of $32 million. The WACC is 17% during the high growth stage and 15% during the stable stage.
Required:
a) Calculate the FCFE. [5 marks]
b) Determine the FCFF. [5 marks]
c) Estimate the value ofequity [10 marks]
d) Calculate the value of the firm. [5 marks]