Question

Using the free cash flow valuation model to price an IPO Personal Finance Problem Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $6.49 per share. Although you are very much interested in owning the company, you are concerned about whether it is fairly priced. To determine the value of the shares, you have decided to apply the free cash flow valuation model to the firm's financial data that you ve accumulated from a variety of data sources. The key values you have compiled are summarized in the following table, EEB a. Use the free cash flow valuation model to estimate CoolTech's common stock value per share b. Judging by your finding in part a and the stock's offering price, should you buy the stock? c. On further analysis you find that the growth rte in FCF beyond 2023 will be 6% rather than 5%. What effect would this finding have on your responses in parts a and b? a. The value of CoolTech's entire company is s Round to the nearest dollar.)

a. The value of CoolTech’s entire company is ...

The value per share of CoolTech’s common stock is...

c. If the growth rate in FCF beyond 2023 will be 6%, the value of CoolTech’s entire company will be...

The value per value of CoolTech’s common stock is ..

Answer 1

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Home ert Page Layout Formulas Data Review V 義Cut ta copy ▼ Format Painter Add-Ins Σ AutoSum , Wrap Text Fill В 1 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional-Format. Cell. Insert Delete Format Sort &Find & Formatting as Table Styles ClearFilter Select Clipboard Font Alignment Cells dting DG415 DA DB DC DE DF DG DH 397 398 399 SUM 400 401 402 403 404 405 406 407 COOLTECH 4 FREE CASH FLOW 660000 760000 860000 960000 12600000.00 -(DF401 (1+0.05)/(0.13-0.05))] FCF3(1+g)/(WACC-g) TERMINAL VALUE PRESENT VALUE OF ALL FCF OF 4 YEARS YEAR FREE CASH FLOW PV FACTOR @ 13% PV OF ALL FC 860000 0.693050 584070.80 595191.48 596023.14 4 960000 0.613319 588785.98 760000 0.884956 0.783147 660000 2364071.39 409 410 411 412 413 414 415 FIRM'S HORIZON VALUE 12600000.00 -(DF401 (1+0.05)/(0.13-0.05)] FIRM'S TOTAL VALUE TODAY = PRESENT VALUE OF ALL FCF + PV OF HORIZON VALUE FIRM'S TOTAL VALUE TODAY-236407 1.39 + (12600000 x PV IF@ 13%, 4 YEARS) FIRM'S TOTAL VALUE TODAY = 2364071.39 + (12600000 x 0.613319) 10091887.36 OCF CASH FLOW STATN | FCF onfiden elNDEX CURRENCY LOAN CROSS OVER HEDGING MONEY MARKET GM HPR AM TAX GROWTH SUST PREF AND DIV POLICY erences: EV46 30-03-2019

Home ert Page Layout Formulas Data Review V 義Cut ta copy." Format Painter Add-Ins Σ AutoSum , Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Paste Sort &Find & Filter Select 袖 Formatting ▼ as Table-styles ▼ 2 Clear , ▼ ▼ ▼ Clipboard Font Alignment Cells dting DA428 DA DB DC DE DF DG DH 415 416 417 LESS 418 LESS 419 420 421 422 423 424 425 426 427 428 429 430 431 432 433 FIRM'S TOTAL VALUE MARKET VALUE OF DEBT AND PREFERRED STOCK MARKET VALUE OF EQUITY NO OF SHARES PRICE PER SHARE YES, AS IT IS OFFERED AT 6.49, WHICH IS LOWER THAN PRICE WE FOUND WHICH IS 6.60 10091887.36 2020000 810000 7261887.36 1100000 6.60 INCREASE IN GROWTH RATE WILL LEAD TO INCREASE IN VALUE OF FIRM AND THUS, INCREASE IN VALUE OF PRICE PER SHARE OCF CASH FLOW STATN | FCF confidence!NDEX CURRENCY LOAN CROSS OVER HEDGING MONEY MARKET GM HPR AM TAX GROWTH SUST PREF AND DIV POLICY erences: EV46 06:09

Home ert Page Layout Formulas Data Review V Add-Ins Cut Σ AutoSum , 11 Arap Text ·A·를 Ξ 討Merge & Center. 'il conditional as r bat ,Style" insert Delete Format Sort &Find & Format Painter すFor at Painter B 1 프· ー· !론 S. % , Formatting as Table Styles ClearFilter Select dting Clipboard Font Alignment Cells DB423 DA DB DC DE DF DG 423 424 425 426 427 428 429 430 431 432 433 INCREASE IN GROWTH RATE WILL LEAD TO INCREASE IN VALUE OF FIRM AND THUS, INCREASE IN VALUE OF PRICE PER SHARE YEAR FREE CASH FLOW TERMINAL VALUE 4 660000 760000 860000 14537142.86 -(DF428 (1+0.06)/(0.13-0.06))] FCF3(1+g)/(WACC-g) RESENT VALUE OF ALL FCF OF 4 YEARS YEAR FREE CASH FLOW PV FACTOR @ 13% PV OF ALL FCF 4 660000 760000 860000 0.884956 0.7831470.693050 0.613319 584070.80 595191.48 596023.14 588785.98 2364071.39 435 436 437 438 439 440 441 :4 ,' OCF FIRM'S HORIZON VALUE 14537142.86 -(DF428 (1+0.06)/(0.13-0.06))1 FIRM'S TOTAL VALUE TODAY-PRESENT VALUE OF ALL FCF PV OF HORIZON VALUE FI RM'S TOTAL VALUE TODAY-2364071 .39 + ( 1453 7 142.86 x PVI F@ 13%, 4 YEARS) FIRM'S TOTAL VALUE TODAY = 2364071.39 + (14537142.86 x 0.613319) 11279973.36 CASH FLOW STATW erences: EV49 FCF ARM, MS confidence!NDEX CURRENCY LOAN CROSS OVER HEDGING MONEY MARKET GM HPR AM TAX GROWTH SUST PREF AND DIV POLICY 06:12 30-03-2019

Home ert Page Layout Formulas Data Review V s Cut ta copy." Add-Ins Σ AutoSum , Calibri 11 Arap Text Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Paste Sort &Find & Format Painter Formatting as Table Styles ClearFilter Select Clipboard Font Alignment Cells dting DB456 DA DB DC DE DF DG DH 438 439 440 441 442 443 444 LESS 445 LESS 446 447 448 449 450 451 452 453 454 455 456 FIRM'S TOTAL VALUE TODAY = PRESENT VALUE OF ALL FCF + PV OF HORIZON VALUE FIRM'S TOTAL VALUE TODAY-2364071.39 + (14537 142.86 x PVI F@ 13%, 4 YEARS) FIRM'S TOTAL VALUE TODAY 2364071.39+(14537142.86 x 0.613319) 11279973.36 FIRM'S TOTAL VALUE MARKET VALUE OF DEBT AND PREFERRED STOCK MARKET VALUE OF EQUITY NO OF SHARES PRICE PER SHARE 11279973.36 2020000 810000 8449973.36 1100000 7.68 YES, AS IT IS OFFERED AT 6.49, WHICH IS LOWER THAN PRICE WE FOUND WHICH IS 7.68 OCF CASH FLOW STATN | FCF confidence!NDEX CURRENCY LOAN CROSS OVER HEDGING MONEY MARKET GM HPR AM TAX GROWTH SUST PREF AND DIV POLICY erences: EV49 06:12 30-03-2019