Question Four (A) a) You are evaluating the potential purchase of a small business currently generating $42,500 of after-tax cash flow. On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed purchase. Becauseyou are relatively uncertain about future cash flows, you decide to estimate the firms value using several possible assumptions about the growth rate of cash flows. (i) What is the firms value if cash flows are expected to grow at an annual rate of 0% from now to infinity? (2 marks) (ii) What is the firms value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity? (2 marks) (iii) What is the firms value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity? (2 marks) b) Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firms common stock value. The firms CFO has gathered data for performing the valuation using the free cash flow valuation model. The firms weighted average cost of capital is 11%, and it has $1,500,000 of debt at market value and $400,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5 years, 2013 through 2017, are given below. Beyond 2017 to infinity, the firm expects its free cash flow to grow by 3% annually. Year Free Cash Flow (FCF) 2013 $200,000 2014 250,000 2015 310,000 2016 350,000 2017 390,000 (i) Estimate the value of Nabor Industries entire company by using the free cash flow valuation model. (2 marks) (ii) Use your finding in part i, along with the data provided above, to find Nabor Industries common stock value. (2 marks) (iii) If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share? (2 marks)