Question

Using the free cash flow valuation model to price an IPO  Personal Finance Problem   Assume that you have an opportunity to buy the stock of​ CoolTech, Inc., an IPO being offered for ​$5.12 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, LOADING.... 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 5​% rather than 4​%. What effect would this finding have on your responses in parts a and b​?

Table:

Free cash flow Year (t) FCF Other data

2020 $700,000 Growth rate of FCF, beyond 2023 to infinity=4%

2021 $790,000 Weighted average cost of Capital =13%

2022 $880,000 Market value of all debt=$1,850,000

2023 $960,000 Market value of preferred stock=$740,000

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

Answer 1

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