Question: The Omega Products Company is a successful small, rapidly growing, closely held corporation. The equity owners are considering selling the firm to an outside buyer and want to estimate the value of the firm. Last year's income statement (2016) can be found on the related spreadsheet. Sales are expected to grow at an annual percentage rates of 20%, 15%, 10%, 5% & 3% beginning in 2017 and continuing thereafter.

Selected balance sheet accounts at the end of 2016 were as follows. Net fixed assets were $50,000. The sum of the required cash, accounts receivable, and inventories accounts was $50,000. Accounts payable and accruals totaled $25,000. Each of these balance sheet accounts was expected to grow with sales over time. No changes in interest-bearing debt were projected and there were no plans to issue additional shares of common stock. There are currently 10,000 shares of common stock outstanding.

Data have been gathered for a "comparable" publicly-traded firm in the same industry that Omega's operates in. The cost of common equity for this other firm, ALPHA Products, was estimated to be 25 percent. Omega has survived for a period of years. Management is not currently contemplating a major financial structure change and believes a single discount rate is appropriate for discounting all cash flows.

Project Omega's income statements for 2017 through 2021.

Determine the annual increases in required net working capital and capital expenditures (CAPEX) for Omega for the years 2017 to 2021.

Project annual operating free cash flows for the years 2017 to 2021.

The annual operating free cash flow to equity is calculated as: net income + depreciation - CAPEX - increases in required NWC + increases in interest-bearing debt. Note: No changes in interest-bearing debt were projected and there were no plans to issue additional shares of common stock.

Estimate Omega's terminal value cash flow at the end of 2020.

Estimate Omega's equity value in dollars and per share at the end of 2016.

Omega's management was wondering what the firm's equity value (dollar amount and on a per share basis) would be if the cost of equity capital was only 20 percent. Recalculate the firm's value using this lower discount rate (also, as of the end of 2016).

Now assume that the $35,000 in long-term debt (and therefore interest expense at 10%) is expected to grow with sales. Recalculate the equity using the original 25% discount rate (use the second spreadsheet for part G).