XYZ Ltd. is a small, private firm making and selling greeting cards. Henry Cravings, a general partner at a major leveraged buyout firm, is interested in buying XYZ. Before proceeding with a bid, he is interested in getting an estimate of what XYZ might be worth. In order to do that, he has gathered the following information:

Previous year's income statement looks like this (in $000's):

Sales 10,000

Cost of goods sold 7,000

Selling, General & Administrative Costs 2,000

XYZ has no capital expenditures and no depreciation.

Sales are expected to grow at 20% over the next five years, whereafter they are expected to grow at 3% for the foreseeable future.

COGS and SGA are expected to remain at a constant fraction of sales.

XYZ is running with 60 days in inventory, gives 60 days of trade credit to customers, and receives 30 days trade credit from suppliers.

a. If the discount rate is 10%, what is the value of XYZ? Assume that the first cash flows start a year from now, and the corporate tax rate is 33%.

b. How sensitive is the valuation to changes in:

The terminal growth rate?

The gross margin (COGS/Sales)?

The discount rate?

Days in inventory, Days of trade credit to consumers, Days of trade credit from suppliers?