Question

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 model to the firm's financial data that you've developed from a variety of data sources. The key values you have compiled are summarized in the following table. (below)

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?

c. On 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 parts a and b?

Year :FCF 2016 730,000, 2017 810,000 ,2018 890,000, 2019 1,020,000

Growth rate of fcf beyond 2019 to infinity=2%

Weighted average cost of capital=12%

market value of all debt= $1,840,000

market value of preferred stock= $740,000

Number of shares of common stock to be issued= 1,100,000

Answer 1

Solution:

Free cash flow valuation is done in the excel sheet and image is attached below

Answers to

Question A ) Value of stock = 6.01

Question B ) Yes, one should buy the stock as from this valuation intrinsic value = 6.01, which is more than offered price of $2.13

Question C ) When we change growth rate to 3% after 2019 onwards then share price = 6.74

part A )So Value of the stock = 6.74

part B ) Yes, one should buy the stock as from this valuation intrinsic value = 6.74, which is more than offered price of $2.13