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Amarindo, Inc.​ (AMR), is a newly public firm with 10.0 million shares outstanding. You are doing...

Amarindo, Inc.​ (AMR), is a newly public firm with 10.0 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be $14.86 million, and you expect the​ firm's free cash flows to grow by 4.4​% per year in subsequent years. Because the firm has only been listed on the stock exchange for a short​ time, you do not have an accurate assessment of​ AMR's equity beta.​ However, you do have beta data for​ UAL, another firm in the same​ industry: AMR has a much lower​ debt-equity ratio of 0.24​, which is expected to remain​ stable, and its debt is risk free.​ AMR's corporate tax rate is 32​%,

the​ risk-free rate is 5.3​%, and the expected return on the market portfolio is 11.1%.

Equity Beta                   Debt Beta                     Debt and Equity Ratio

UAL                  1.20                              .24                               .8

a. Estimate​ AMR's equity cost of capital.

b. Estimate​ AMR's share price.

a. Estimate​ AMR's equity cost of capital.

Solutions

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

jeff jeffy answered 2 years ago
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