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Question - Tel Tech, a software company reported revenues 2 million and net income of $300,000 for the latest year. Depreciation and amortization amounted to $50,000. The firm's net operating cash flows are expected to grow at 5% per annum for the next two years and will remain constant thereafter. The firm's annual capital expenditure will remain constant $50,000. The firm does not expect any increase in working capital requirements. The firm is financed by 60% debt and 40% equity. Risk free rate is 1.5%, default spread 2% and cost of equity is 5%. Tax rate is 20%. The non-operating assets at the end of the year amount to $150000.
Required -
1. Estimate the free cash flows to the firm for the latest year.
2. Estimate the discount rate to be used in firm valuation.
3. Estimate the value of the firm.
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