[1] Beedles Inc. needed to raise $14 million in an IPO and chose Security Brokers Inc. to underwrite the offering. The agreement stated that Security Brokers would sell 3 million shares to the public and provide $14 million in net proceeds to Beedles. The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $300,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answers to the nearest dollar. Loss should be indicated by a minus sign.

a. $5 per share?

$ ____________

b. $6 per share?

$ ____________

c. $4.25 per share?

$ ____________

[2.] Bynum and Crumpton, a small jewelry manufacturer, has been successful and has enjoyed a positive 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.

Company data Abercrombe Gunter B&C

Shares outstanding 6 million 11 million 500,000

Price per share $31.00 $51.00 NA

Earnings per share $2.20 $3.13 $2.60

Free cash flow per share $1.63 $2.54 $1.90

Book value per share $14.00 $24.00 $18.00

Total assets $119 million $314 million $11 million

Total debt $35 million $50 million $2 million

a. B&C is a closely held corporation with only 500,000 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:

Year 1 2 3 4 5

FCF $1,000,000 $1,050,000 $1,208,000 $1,329,000 $1,462,000

After Year 5, free cash flow growth will be stable at 7% per year. Currently, B&C has no nonoperating assets, and its WACC is 12%. Using the free cash flow valuation model, estimate the (1) horizon value, (2) intrinsic value of operations, (3) intrinsic value of equity, and (4) intrinsic per share price. Do not round intermediate calculations. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answers for the value of equity to the nearest dollar and for the value of equity per share to the nearest cent.

(1) Horizon value $_____________

(2) Intrinsic value of operations $____________

(3) Intrinsic value of equity $_____________

(4) Intrinsic per share price $_____________

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. Do not round intermediate calculations. Round your answers to two decimal places.

Abercrombe Gunter B&C

D/A __________% __________% __________%

P/E ___________ ___________ __________

Market/Book __________ __________ __________

ROE __________% __________% __________%

P/FCF __________ __________ __________