Question

Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has been successful and has enjoyed a positive growth trend. Now B&C is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price for the stock. The company and its investment banks believe that the proper procedure is to conduct a valuation and select several similar firms with publicly traded common stock and to make relevant comparisons.
Several jewelry manufacturers are reasonably similar to B&C with respect to product mix, asset composition, and debt/equity proportions. Of these companies, Abercrombe Jewelers and Gunter Fashions are most similar. When analyzing the following data, assume that the most recent year has been reasonably "normal" in the sense that it was neither especially good nor especially bad in terms of sales, earnings, and free cash flows. Abercrombe is listed on the AMEX and Gunter on the NYSE, while B&C will be traded in the Nasdaq market.

Company data	Abercrombe		Gunter		B&C
Shares outstanding	6 million		10 million		500,000
Price per share	$30.00		$50.00		NA
Earnings per share	$2.20		$3.13		$2.60
Free cash flow per share	$1.63		$2.54		$2.00
Book value per share	$15.00		$21.00		$18.00
Total assets	$125 million		$260 million		$10 million
Total debt	$35 million		$50 million		$4 million

The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

1. B&C is a closely held corporation with only 500,000 shares outstanding. Free cash flows have been low and in some years negative due to B&C's recent high sales growth rates, but as its expansion phase comes to an end B&C's free cash flows should increase. B&C anticipates the following free cash flows over the next 5 years:

   Year	1	2	3	4	5
   FCF	1,000,000	1,050,000	1,208,000	1,329,000	1,462,000

   After Year 5, free cash flow growth will be stable at 7% per year. Currently, B&C has no non-operating assets, and its WACC is 12%. Using the free cash flow valuation model, estimate B&C's intrinsic value of equity and intrinsic per share price. Do not round intermediate calculations. Round your answer for the value of equity to the nearest dollar. Round your answer for the value of equity per share to the nearest cent.

   Value of equity	$
   Per share value of equity	$

2. Calculate debt to total assets, P/E, market to book, P/FCF, and ROE for Abercrombe, Gunter, and B&C. For calculations that require a price for B&C, use the per share price you obtained with the corporate valuation model in part a. Do not round intermediate calculations. Round your answers to two decimal places.

   	Abercrombe		Gunter		B&C
   D/A	%		%		%
   P/E
   Market/Book
   ROE	%		%		%
   P/FCF

3. Using Abercrombe's and Gunter's P/E, Market/Book, and Price/FCF ratios, calculate the range of prices for B&C's stock that would be consistent with these ratios. For example, if you multiply B&C's earnings per share by Abercrombe's P/E ratio you get a price. What range of prices do you get? Do not round intermediate calculations. Round your answers to the nearest cent.

   The range of prices:
   from $   to $  

Answer 1

Answer-A:

Step-1: Calculate the Horizon Value of FCF at Year 5, when growth rate stabilizes as follow:

     = FCF5 ( 1+ G)/ (WACC – G)

         (Here FCF5 means free cash flow at year 5, G= growth rate, WACC is weighted average cost of capital)

     = 1,462,000 (1 + 7%)/ (12% - 7%) = 3,12,86,800

Step-2: Calculate the present value of FCF for all year (1-5) and terminal value at the end of Y 5 as follow:

Year	FCF	Discount factor @12%	Present value
1	1000000	0.89286	892857.14
2	1050000	0.79719	837053.57
3	1208000	0.71178	859830.54
4	1329000	0.63552	844603.53
5	1462000	0.56743	829578.06
5	31286800	0.56743	17752970.55
PV of Operations			22016893.39

Step:3 Now calculate the Value of Equity from Value of Operations as Follow:

Value of Operations	2,20,16,893.39
Add: Non-Operating Assets	0.00
Less: Value of Debt	40,00,000.00
Value of Equity	1,80,16,893.39

Value of Equity Per Share = Value of Equity/ No. of Shares Outstanding

                                              = 1,80,16,893.39/5,00,000 = 36.03 per share

Answer-B:

Ratio	Description	Abercrombe	Gunter	B&C
D/A	Total Debt	35000000	50000000	4000000
	Total Assets	125000000	260000000	10000000
		28.00	19.23	40.00
P/E	Price Per Share	30	50	36.03
	Earnings	2.2	3.13	2.6
		13.64	15.97	13.86
Market/Book	Market Price per Share	30	50	36.03
	Book Price Per Share	15	21	18
		2.00	2.38	2.00
ROE	Earnings per Share	2.2	3.13	2.6
	Book Value per Share	15	21	18
		14.67	14.90	14.44
P/FCF	Price per Share	30	50	36.03
	Free Cash Flow per Share	1.63	2.54	2
		18.40	19.69	18.02

Answer-C:

	Ratio	B&C's Corresponding measure	Estimated Price of B&C's Share
Abercromber's P/E Ratio	13.64	2.6	35.46
Gunter's P/E Ratio	15.97	2.6	41.52
Abercromber's Market/Book Ratio	2	18	36.00
Gunter's Market/Book Ratio	2.38	18	42.84
Abercromber's Price/FCF Ratio	18.4	2	36.80
Gunter's Price/FCF Ratio	19.69	2	39.38

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