milo Companys CFO has provided a long-term forecast for milo as follows:

EBIT Net Income Discount Factor

2021 $42,000,000 $20,000,000 0.91

2022 $46,200,000 $22,000,000 0.83

2023 $47,000,000 $24,000,000 0.75

2024 $48,000,000 $26,000,000 0.68

2025 $50,000,000 $28,000,000 0.62

Assumptions:

• milo Company uses a 10% weighted average cost of capital (WACC) and a minimum required return on equity of 13.33%
• The tax rate is 50%
• The company pays $2,000,000 a year in interest for all years except 2022 which is $2,200,000.
• Depreciation is expected to be $5,000,000 per year
• After 2021, new equipment purchases are expected to be $10,000,000 a year
  • See expenditures for 2021 above which is a one-time modernization year
• Net working capital changes are assumed to be ($1,000,000) a year as sales grow
• The terminal value of the company at the end of 2024 is $280,000,000
  • The growth rate after 2025 is 3%
• The purchase will take place at the beginning of 2021, if accepted

Required:

1. Prepare a valuation of milo Companys common shares using the free cash flow to the firm method then subtracting debt.
2. What are three (3) assumptions in the valuation calculation you would advise milo Companys CFO to keep in mind in assessing the sensitivity of results of the valuation. (3 marks)
3. Do you think the company is a buy, yes or no? Given reasons for your answers. Note: only use data you calculated in this question.