Task: You are given the following information:
a. Baseline (last year) sales: $10 million
b. Sales growth rate years 1-10: 25%
c. Sales growth rate after year 10: 5%
d. Profit margin years 1-10: 20%
e. Profit margin after year 10: 10%
f. Fixed capital investment rate: 10%
g. Working capital investment rate: 7%
h. Cash tax rate: 30%
i. Cost of capital: 20% during years 1-10; and 12% after year 10
j. Marketable securities: $2 million
k. This company is privately held.
Answer the following questions:
Problem 1. What is the value of this company?
Problem 2. Say your opportunity cost (as an independent investor) of capital for an investment of this risk is 18% and that the firm offers you a 20% ownership of the company for $6 million, would you accept this offer as one that increases your wealth? If yes, why yes? If not, why not?