Question

Assume that you have an opportunity to buy the stock of​ CoolTech, Inc., an IPO being offered for... Assume that you have an opportunity to buy the stock of​ CoolTech, Inc., an IPO being offered for ​$11.88 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,

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 rate in FCF beyond 2023 will be 6​% rather than 5​%. What effect would this finding have on your responses in parts a and b​?

Free cash flow
Year​ (t)	FCF			Other data
2020	​$720,000			Growth rate of​ FCF, beyond 2023 to infinityequals=5%
2021	​$800,000			Weighted average cost of capitalequals=12 %
2022	​$950,000			Market value of all debtequals=$2,550,000
2023	​$1,060,000			Market value of preferred stockequals=$ $1,020,000
				Number of shares of common stock to be issuedequals=1,100,000

Answer 1

Terminal Value = 2023 FCF / (WACC - FCF growth rate)

Since the intrinsic value is less than the IPO price, we should not invest. .

Now if the perpetual growth rate is 6% instead of 5% the Terminal Value changes to = 1060000/(12%-6%) = 17,666,666.67

Incorporating and calculating the new price, we get per share price of 9.35, which is still less than the IPO price, hence we should not invest.