Question: Firewall Technologies is a privately-held developer of anti-virus and network security software. As part of your growth strategy, in late 2016 you initiate discussions with Firewall's founder about the possibility of acquiring the business at the end of 2016. You are trying to value Firewall using a discounted free cash flow (FCF) approach.

(a) To estimate Firewall's cost of capital, you obtain the following data on its closest publicly-traded competitor. This competitor is also a developer of anti-virus and network security software and has no other businesses:

Total Debt Market Value: $400 million

Number of shares of common stock: 80 million

Stock price per share: $15.00

Beta of equity: 1.20

The competitor's debt is highly rated and its debt beta is zero. Your contacts on Wall Street tell you that the expected return on the market portfolio is 10% for the foreseeable future. The current risk-free rate for long-term investments is 4%. Use the data provided to estimate the cost of capital that should be used to discount Firewall's free cash flows. Assume that the CAPM holds.

(b) Suppose you forecast free cash flows for Firewall of $30 million in 2017 and of $40 million in 2018. After 2018, you expect its free cash flows to grow at a 5% rate forever. What is your estimate of Firewall's enterprise value at the end of 2016?