Question
In: Finance
Personal Finance Problem Assume that you have an opportunity to buy the stock of CoolTech, Inc.,...
Personal Finance Problem Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for
$12.37 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,
2020 720,000
2021 860,000
2022 980,000
2023 1,100,000
| Growth rate of FCF, beyond
2023 toinfinity=6% |
||||
|
2021 |
$860,000 |
Weighted average cost of
capital=11% |
||
|
2022 |
$980,000 |
Market value of all
debt=$3,630,000 |
||
|
2023 |
$1,100,000 |
Market value of preferred
stock=$1,450,000 |
||
|
Number of shares of common stock to be issued=1,100,000 |
.
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
7%
rather than
6%.
What effect would this finding have on your responses in parts a and
b?
Solutions
Expert Solution
The market price is $12.37 per share. To find whether it is fairly priced or not, we can compare the intrinsic value of the stock using FCF valuation with the market price of the share.
Given here is FCFF(Free cash flow to the firm). To find the intrinsic value per share, we have to find the overall value using FCFF valuation, deduct the market value of the preferred stock and debt and then divide it by the number of outstanding shares.
jeff jeffy answered 2 years agoRelated Solutions
assume that you have an opportunity to buy the stock of CoolTech, Inc. an IPO for...
assume that you have an opportunity to buy the stock of CoolTech,
Inc. an IPO for $8.70 per share. although you are very much
interested in owning a company you are concerned about whether it
is fairly priced. to determine the value of the shares do you have
decided to apply the free cash flow valuation model to the firms
financial data that you've accumulated from a variety of data
sources the key values you have complied are summarized in...
Assume that you have an opportunity to buy the stock of CoolTech, Inc. an IPO being...
Assume that you have an opportunity to buy the stock of CoolTech,
Inc. an IPO being offered $2.87 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
firms financial data that you accumulated from a variety of data
resources. The key values you have complied are summariezed in...
Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being...
Assume that you have an opportunity to buy the stock of
CoolTech, Inc., an IPO being offered for $3.87 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...
Assume that it is the end of year 2015 and you have an opportunity to buy...
Assume that it is the end of year 2015 and you have an
opportunity to buy the stock of CoolTech, Inc., an IPO being
offered for $4.92 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 developed from a variety of data
sources....
You have the opportunity to buy a stock that just paid a dividend (D0) of $2.00....
You have the opportunity to buy a stock that just paid a
dividend (D0) of $2.00. After doing some research, you
have forecasted the following growth rates for the firm’s
dividends:
g1 =
-40%
g2 = 0%
g3 =
50%
g4 =
25%
g5-infinity = 3%
In addition, you estimate that the required return for this
stock should be 8%. Show your work.
Calculate the forecasted dividends for years 1 through 5
Calculate the forecasted stock price for year...
Common stock valuelong dash—Variable growth Personal Finance Problem Home Place Hotels, Inc., is entering into a...
Common stock
valuelong dash—Variable
growth Personal Finance Problem Home Place Hotels, Inc., is
entering into a 3-year remodeling and expansion project. The
construction will have a limiting effect on earnings during that
time, but when it is complete, it should allow the company to
enjoy much improved growth in earnings and dividends. Last year,
the company paid a dividend of
$4.404.40.
It expects zero growth in the next year. In years 2 and 3,
66%
growth is expected, and in...
Common stock value—Variable growth Personal Finance Problem Home Place Hotels, Inc., is entering into a 3-year...
Common stock value—Variable growth Personal Finance
Problem Home Place Hotels, Inc., is entering into a 3-year
remodeling and expansion project. The construction will have a
limiting effect on earnings during that time, but when it is
complete, it should allow the company to enjoy much improved growth
in earnings and dividends. Last year, the company paid a dividend
of
$3.50. It expects zero growth in the next year. In years 2 and
3, 2% growth is expected, and in year...
Long-term investment decision, payback method Personal Finance Problem Bill Williams has the opportunity to invest in...
Long-term investment decision, payback method Personal Finance
Problem Bill Williams has the opportunity to invest in project A
that costs $8,300 today and promises to pay $2,300 $2,600,
$2,600, $2,00 and $1,800 over the next 5 years. Or, Bill can
invest $8,300 in project B that promises to pay $1,600, $1,600,
$1,600, $3,700 and $3,900 over the next 5 years.
(Hint: For mixed stream cash inflows, calculate cumulative
cash inflows on a year-to-year basis until the initial investment
is...
Long-term investment decision, payback method Personal Finance Problem Bill Williams has the opportunity to invest in...
Long-term investment decision, payback method Personal Finance
Problem Bill Williams has the opportunity to invest in project A
that costs
$ 6 comma 600$6,600
today and promises to pay
$ 2 comma 200$2,200,
$ 2 comma 500$2,500,
$ 2 comma 500$2,500,
$ 2 comma 000$2,000
and
$ 1 comma 700$1,700
over the next 5 years. Or, Bill can invest
$ 6 comma 600$6,600
in project B that promises to pay
$ 1 comma 300$1,300,
$ 1 comma 300$1,300,
$...
Using the free cash flow valuation model to price an IPO Personal Finance Problem Assume that...
Using the free cash flow valuation model to price an IPO
Personal Finance Problem Assume that it is the end of the year 2015
and you have an opportunity to buy the stock of CoolTech, Inc., an
IPO being offered for $2.13 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...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- 1. Define a struct for a soccer player that stores their name, jersey number, and total...
- A wheel is rotating freely at angular speed 530 rev/min on a shaft whose rotational inertia...
- NPV Your division is considering two projects with the following cash flows (in millions): 0 1...
- You will write a program in Scheme which compares the accuracy of two medical tests for...
- Your goal in functional modeling is to depict what activities users perform and how the system...
- Just make it very simple For any of the business-related projects you are familiar with, provide...
- Catherine (wife) and Peter (husband) Mallen had lived together unmarried for some four years when Catherine...
ADVERTISEMENT