Q2. Company B earned$20 million before interest and taxes on revenues of $60 millionlast year. Investment in fixed capital was $12 million, anddepreciation was $8 million. Working capital investment was $3million. The company expects earnings before interest and taxes(EBIT), investment in fixed and working capital, depreciation, andsales to grow at 12% per year for the next five years. After fiveyears, the growth in sales, EBIT, and working capital investmentwill decline to a stable 4% per year, and investments in fixedcapital and depreciation will offset each other. The company’s taxrate is 20%. Suppose that the weighted average cost of capital is12% during the high growth stage and 8% during the stable stage.The calculation of FCFF in year 1 through year 5 is shown in thefollowing table:
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
Sales | 60.00 | | | | | | |
EBIT | 20 | | | | | | |
EBIT(1-T) | 16 | | | | | | |
Depreciation | 8 | | | | | | |
CAPEX | 12 | | | | | | |
Change in working capital | 3 | | | | | | |
FCFF | | | | | | | |
Finish the table and use WACC model tocalculate the value of the company.(please show the details)(50points)
