You own a company that produces and distributes course packets for classes at local universities via the Internet. You have asked a friend to invest $35,000 in the business. Your friend wants to know what the business is worth so that he can determine how much of the equity (e.g., what percentage) he should expect to receive for his investment. You offer to help him value the business.

The business is expected to generate revenue of $110,000 and incur cash operating expenses of $70,000 next year. Over the following three years, revenue and cash operating expenses are expected to increase 15 percent, 10 percent, and 7 percent. After year 4 they are expected to grow 2 percent per year forever. Depreciation and amortization, capital expenditures, and additions to working capital are expected to equal 5 percent, 6 percent, and 1 percent of revenue, respectively, in the future. You have determined that a target capital structure of 10 percent is reasonable for this business. With this capital structure, the pretax cost of debt will be 6 percent and the beta for the equity will be 1.30. The average tax rate for the business is 10 percent, and the marginal rate is 20 percent. The risk-free rate is 4.25 percent, and the market risk premium is 6.01 percent. What is a 100 percent equity interest in the business worth? What percentage of the equity should your friend get for his investment?