Using the free cash flow valuation model to price an IPO Assume that you have an opportunity
Question:
Using the free cash flow valuation model to price an IPO Assume that you have an opportunity to buy the stock of CoolTech Inc., an IPO being offered for $12.50 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.
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 of FCF beyond 2023 will be 3% rather than 2%. What effect would this finding have on your responses in parts a and b?
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Free cash flow Year (t) Other data FCF; Growth rate of FCF, beyond 2023 to infinity Weighted average cost of capital = 8% Market value of all debt = $2,700,000 Market value of preferred stock = $1,000,000 Number of shares of common stock outstanding $ 700,000 2020 2% 2021 2022 2023 800,000 950,000 1,100,000 1,100,000
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a The value of the firms common stock may be found in four steps Step 1 Find present value in 2023 o...View the full answer
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The weighted average cost of capital (WACC) represents a firm\'s average after-tax cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt. WACC is the average rate that a company expects to pay to finance its assets
