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11.     Etna Tech is a company set up by two friends, Larry and Mike. The...

11.     Etna Tech is a company set up by two friends, Larry and Mike. The company’s only product is a popular online game called Fisticuffs. Etna Tech will be holding an IPO of 5 million shares tomorrow. Market expectations are high for this IPO. The company is expected to pay $1 per share starting one year from now. The dividends are then expected to grow at a supernormal rate of 30% for three years, before dropping down to 15% for three more years, and then to 5% afterwards. What is the total value of this IPO if the required return for similar issues is 18%?

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Expert Solution

Share price $15.64
Year Dividend Horizon value Net Value
1 1.00 1.00
2 1.30 1.30
3 1.69 1.69
4 2.20 2.20
5 2.53 2.53
6 2.91 2.91
7 3.34 26.99 30.33
8 3.51
Share price $15.64

Horizon value = D8/(k-g)

jeff jeffy answered 3 months ago
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