MINI CASE

Lo-Tech’s shareholders have voted to cease its diversification strategy and refocus on its core
businesses. As a part of this process, the company is seeking to divest HI-Tech its start-up high
–technology subsidiary. George, Investment banker has been approached by the management
of Hi-tech who want to purchase the company. He decides to value Hi-Tech using the NPV
method. George and Hi-tech management have agreed on the following’s projections:

Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9

Revenue 100 140 210 250 290 380 500 650 900
Costs 230 240 260 275 290 310 350 400 470
EBIT -130 -100 -50 -25 -0 70 150 250 430

The company has $100 million of NOLs that can be carried forward and offset against future
income. In addition, hi-tech is projected to generate further losses in its early years of operation
that it will also be able to carry forward. The tax rate is 40%. The average unlevered beta of
five comparable high-technology companies is 1.2. hi-tech has no long-term debt Treasury
yields for ten-year bonds are 6%. capital expenditures requirements are assumed to be equal to
depreciations. The market risk premium is assumed to be7.5%.Net working capital
requirements are forecast as 10% of sales. EBIT is projected to growat3% per year in perpetuity
after year 9.
Calculate WACC and Terminal value and FCFM.