Netsoft is a company that manufactures networking software. In the current year, the firm reported operating earnings before interest and taxes of $200 million (operating earnings does not include interest income), and these earnings are expected to grow 4% a year in perpetuity. In addition, the firm has a cash balance of $250 million on which it earned interest income of $15 million.
The unlevered beta for other networking software firms is 1.20, and these firms have on average cash balances of
10% of firm value. If Netsoft has a debt ratio of 15%, a tax rate of 40%, a return on capital of 10% on operating assets, and a cost of debt of 10%, estimate the value of the firm. (The riskfree rate is 6%, and you can assume a market risk premium of 5.5%.)