During college, Blake found that she could turn her baking obsessions into a delivery business named Sleepless Brownies. Blake is the sole employee and operator of the business. After graduation, Blake invites her friend Taylor to invest in expanding the operation and share the work. A decade passes, and they have expanded their operations into a multinational chain. Blake and Taylor decide to go public with their company and hire the investment bank Solomon Sisters (SS) to advise with issuance and marketing of securities. SS estimate the company cash flows for the next few years will be as follows:

Cash Flow (in thousands USD)

Year 1 $5,000

Year 2 $6,750

Year 3 $8,450

Year 4 $9,500

Year 5 $10,000

After 5 years, cash flow is expected to grow at a rate of 1% a year. During its market research, SS found that a comparable food delivery firm Awake Smoothie went public at a value of $200 million. It was expected to have cash flows of $4 million in its first year and grow at a rate of 4% perpetually.

1. After 5 years, cash flow is expected to grow at a rate of 1% a year. During its market research, SS found that a comparable food delivery firm Awake Smoothie went public at a value of $200 million. It was expected to have cash flows of $4 million in its first year and grow at a rate of 4% perpetually.

2. The IPO for Sleepless Brownies is successful. Blake and Taylor decide to add additional retail locations and look into buying a chain of 5 small shops in the Midwest. The owner of the chain claims each shop will have cash flows of $250,000 per year, and they will sell the chain for $10 million. Assume cash flows are perpetual and start the year after the sale.

3. After the IPO, Blake and Taylor decide to expand to international markets in Europe. They plan to invest in local farms to source fresh, organic dairy. They narrow down their options to two alternatives:

4. 10 years after the IPO, Blake decides to retire. She has accumulated 200,000 shares in Sleepless Brownies stock as well as $2 million dollars from compensation. The price of Sleepless Browniesstock is $72/share.

a.Suppose she expects the return on Sleepless Brownies stock to get a return of 10% each year for the next 10 years.

If she keeps her portfolio as is, what would be her net worth in 10 years? What if she invests completely in Sleepless Brownies stock?

b. Suppose Blake can store her cash in a bank at a 0.2% monthly rate. If compounding is monthly, what is the EAR after 10 years? What is her net worth after 10 years?

c..A fund offers her a guaranteed return of 11% per year, with a flat rate of $400,000 per year. Should she sell all of her stock now and invest everything in the fund? Should she sell all of her stock now to invest in the fund but keep the cash as contingency?