Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has been successful and has enjoyed a good 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.

a. B&C is a closely held corporation with only 1,000 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:

After Year 5, free cash flow growth will be stable at 7% per year. Currently, B&C has no non-operating assets, has $4 million in debt, and its WACC is 12%. Calculate B&C's value of equity and per share value of equity using the corporate valuation model.
b. 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.
c. On the basis of your answer to parts a and b, do you think B&C stock would sell at a price in the same "ballpark" as that of Abercrombe and Gunter-that is, in the range of $25 to $100 per share?
d. 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? How does this compare with the price you get using the corporate valuation model?
e. Assuming B&C's management can split the stock so that the 1,000 shares could be changed to 10,000 shares, 100,000 shares, or any other number, would such an action make sense in this case? Why or why not?
f. Should B&C split the stock and at what price do you think B&C shares should be offered to the public? You will want to select a price that will be low enough to induce investors to buy the stock but not so low that it will rise sharply immediately after it is issued. Think about the corporate valuation model and the multiples and ROEs from part d.

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B&C Company Data Shares outstanding Price per share Earnings per share Free cash flow per share Book value per share Total assets Total debt Abercrombe 5 million $35.00 $2.20 $1.54 $16.00 $115 million $35 million Gunter 10 million $47.00 $3.75 $2.25 $21.00 $260 million $50 million 1,000 NA $1,332.50 16.00 $7,500.00 $11.5 million $4 million Year FCF 1,025,000 1,076,000 1,237,000 1,1361,000 1,497,000