Sematech is an all-equity firm that has achieved a dominant market position in its targeted market. Its huge market share makes it unlikely that the firm can grow faster than the growth rate of the overall market, which is expected to be 8% annually for the foreseeable future. Its net income in 2017 was $15 million. Depreciation expense and capital expenditures were $5 million and $10 million, respectively. The annual change in working capital was basically zero. The 10-year Treasury bond rate is 5% and the firm’s beta is estimated to be 1.3. The historical risk premium on stocks over the risk free rate of return is 5.5%. Solve the following:
a. Calculate Sematech’s discount rate.
b. Calculate the firm’s free cash flow in 2017.
c. Estimate the value of Sematech at the end of 2017.