Using the free cash flow valuation model to price an IPO Assume that you have an opportunity to buy the stock of Alumina Tech Ltd., an IPO being offered for £14.20 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 (FCF) 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.

a. Estimate Alumina Tech’s common stock value per share by using the FCF valuation model.

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 of FCF beyond year 2023 will be 4% rather than 3%. What effect would this finding have on your responses in parts a and b?

Transcribed Image Text:

Free cash flow Year (t) FCFt 2020 450,000 2021 400,000 425,000 2022 2023 550,000 Other data Growth rate of FCF, beyond 2023 to infinity = 3% Weighted average cost of capital = 6% Market value of all debt = 1,350,000 Market value of preferred stock = 500,000 Number of shares of common stock outstanding = 550,000