Question

G P 7-17 c. If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share? $10.76 Personal Finance Problem Using the free cash flow valuation model to price an IPO Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $12.50 per share. Although you are very much interested in owning the company, you are con- cerned 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 developed from a variety of data sources. The key values you have com- piled are summarized in the following table. Free cash flow Year (t) FCF 2016 $ 700,000 2017 800,000 2018 950,000 - 2019 1,100,000 Other data Growth rate of FCF, beyond 2019 to infinity -2% Weighted average cost of capital - 8% Market value of all debt = $2,700,000 Market value of preferred stock = $1,000,000 Number of shares of common stock outstanding = 1,100,000 1,100,000 a. Use the free cash flow valuation model to estimate CoolTech's common stock value per share. b. Judging on the basis of your finding in part a and the stock's offering price, should you buy the stock? 18.333.335.2On further analysis, you find that the growth rate in FCF beyond 2019 will be 3% rather than 2%. What effect would this finding have on your responses in 1 100,000 parts a and b? 19,433, 333.30 coupon interest rates and pay annual interest. Bond A has exactly

Answer 1

1.
Enterprise Value=700000/1.08+800000/1.08^2+950000/1.08^3+1100000/1.08^4+1100000/1.08^4*1.02/(8%-2%)=16641750.91873

Price per share=(Enterprise Value-Debt-Preferred Stock)/Number of shares=(16641750.91873-2700000-1000000)/1100000=11.76523

2.
As price should be 11.76523 but IPO is oferred at higher price of 12.50, do not buy the stock

3.
Enterprise Value=700000/1.08+800000/1.08^2+950000/1.08^3+1100000/1.08^4+1100000/1.08^4*1.03/(8%-3%)=19552469.13580

Price per share=(Enterprise Value-Debt-Preferred Stock)/Number of shares=(19552469.13580-2700000-1000000)/1100000=14.41134

Buy the stock as IPO is offered at lower price of 12.50