EXERCISE $4$ Construct $20-$year ERM model for valuation of case below. Pear, Inc., a competitor to Apple in the handheld electronic device market, manufactures Smart Phones and similar devices, and sells them through retail outlets in the United States. It hopes to expand operations into Canada, someday, but has no specific plans as of yet. Pear's main competitive advantage is a service called InfinityG, which allows for better reception and faster data transfer rates than its competitors. Pear's advertising also claims that InfinityG is much better at protecting customer data through enhanced encryption on data transfers, and other proprietary techniques. Modeling input: $-$ At the end of last year, Pear had $1,000$ salespeople, selling an average of $750$ units per year per salesperson, based on a $\backslash (\backslash$$ $250\backslash )$ purchase price per unit, which in the past has just kept pace with inflation. $-$ Pear tends to lose $\backslash (10\backslash \%\backslash )$ of its salespeople each year. Last year, Pear hired an additional $200$ new salespeople; starting this year, Pear plans to increase the number of additional new salespeople hired each year by $100,$ e$.$g$.300,400,$ and then level off at $500$ new hires per year for rest of projection period. $-$ Other revenues last year included net investment income of $\backslash (4\mathrm{.}5\backslash \%\backslash )$ net earned rate on assets of $\backslash (\backslash$$ $140,000,000\backslash ).$ Other assets of $\backslash (\backslash$$ $30,000,000\backslash )$ are non$-$depreciating and non$-$income generating. $-$ Other liabilities are a constant $\backslash$$$50,000,000.-$ Last year, expenses were: $-$ Cost of goods sold $($CGS$)$: $\backslash (\backslash$$ $135,750,000\backslash ).$ This is a variable cost and varies with the amount of sales each year. $-$ Selling, General $\backslash$& Administrative $($SG$\backslash$&A$)$: $\backslash (\backslash$$ $18,347,826\backslash ).$ These are fixed costs and increase with inflation. $-$ Research $\backslash$& Development $($R$\backslash$&D$)$: $5\backslash \%$ of revenues $($semi$-$variable costs$)-$ There is a $\backslash (\backslash$$ $100,000,000\backslash )$ debt on which Pear pays debt service of $\backslash (6\mathrm{.}00\backslash \%\backslash )$ annually. There are no plans to pay down the debt, and the debt is expected to be renewed indefinitely at the same rate. $-$ Going forward, Pear expects inflation of $\backslash (2\mathrm{.}0\backslash \%\backslash ).-$ Income taxes are generally $\backslash (21\backslash \%\backslash )$ of Earnings Before Income Tax $($EBIT$).($see note below$)-$ Based on their assessment of the riskiness of this business, management uses $\backslash (12\backslash \%\backslash )$ as a hurdle rate to estimate returns expected by shareholders. $-$ There are $88$ million shares outstanding. The stock price is $\backslash (\backslash$$ $7\mathrm{.}50\backslash )$ per share. Assume: $-$ GAAP $=$ TAX basis for taxes $-$ Net Income $=$ shareholder dividends $($all after$-$tax net income is distributed each year$)-$ There are no non$-$cash items $($distributable cash flow $=$ net income$)-$ Company value $=$ present value of distributable cash flow through $20$ years, plus the discounted value of remaining equity at the end of year $20.$