On May 11, 2018, Yen Dollar, a portfolio manager at NewPoint, a mutual fund management firm, pored over analysts’ write-

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On May 11, 2018, Yen Dollar, a portfolio manager at NewPoint, a
mutual fund management firm, pored over analysts’ write-ups of
International Traders Corp.
International Traders is an expanding conglomerate, is a
manufacturing company whose product lines consist of lighting
fixtures, videodiscs, electronic timing devices, travel agencies,
and self-storage space. Dollar was considering buying some
shares for the fund she managed, the NewPoint Large-Cap Fund with
an emphasis on value investing.
International Traders Corp's analyst has projected the following
cash flows and growth rates for the next four years (in millions of
dollars):
Pro Forma Income Statement
2019
2020
2021
2022
2022
Growth Rate
0.2
0.2
0.15
0.1
0.05
Net sales
$550.0
$660.0
$759.0
$835.0
$877.0
Cost of goods sold (70%)
($385.0)
($462.0)
($531.0)
($584.0)
($614.0)
Selling/administrative expense (20%)
($110.0)
($132.0)
($151.8)
($167.0)
($175.4)
Depreciation (8%)
($44.0)
($52.8)
($60.7)
($66.8)
($70.2)
EBIT
$11.0
$13.2
$15.2
$16.7
$17.5
Interest
($5.0)
($6.0)
($8.0)
($10.0)
($10.0)
EBT
$6.0
$7.2
$7.2
$6.7
$7.5
Taxes (30%)
($1.8)
($2.2)
($2.2)
($2.0)
($2.3)
Net income
$4.2
$5.0
$5.0
$4.7
$5.3
All cash flows above are assumed to occur at end-of-year, and it
is expected to grow at rate of 5% after 2022. International
Traders currently has a market value capital structure of 20
percent debt with interest rate 10% and a beta of 2. Depreciation
schedule is 8 percent of net sales and the funds to replace
worn-out equipment is 6 percent of net sales. The company has 5
million shares, $50 million debt and $ 30 million in cash. The
risk-free rate is 3 percent and the market risk premium is 6
percent.
Answer the following questions: