Question
32) Suppose you work as an Equity Research Analyst for the Teachers Retirement Pension Fund. Your fund is offered to purchase BioRocks shares through a
32) Suppose you work as an Equity Research Analyst for the Teachers Retirement Pension Fund. Your fund is offered to purchase BioRocks shares through a public offering at a price of $7.50 per share. While your funds manager is very interested in this stock, he also wants to make sure the fund pays a fair price per share, so he asked you to determine the fundamental price of the companys stock. Using various sources, you gathered the below information to evaluate this potential investment (12.5 points total)
Year | Free cash flow (FCF) forecast, $ | N | Other data |
2023 | 1,200,000.00 | 1 | FCF growth rate (2023 to ) = 4% per year |
2024 | 1,206,000.00 | 2 | Weighted average cost of capital = 17% per year |
2025 | 1,712,180.00 | 3 | Market value of companys debt = $5,000,000 |
2026 | 2,218,545.40 | 4 | Market value of preferred stock = $0 |
|
|
| Number of common shares = 1,200,000 |
- Use the discounted free cash flow valuation approach to estimate the companys price per share. Make sure to include the terminal (2027-) free cash flow in your calculations. (10 points)
- Given the price you found in part (a) and the asking price per share, should your fund buy this companys stocks? Explain why yes/no (2.5 points).
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started