A few months later, Geoff calls you into his office for a discussion. You have been invaluable to this firm and I value your expertise. I have been considering my future retirement. All my money is tied up in this firm. I would like to take this company public so I can cash out some of my equity and buy a private island and self-isolate in paradise. Can you help me determine how to do that? You agree and formulate a plan based on what you learned.

You decide to use a pure play/substitute approach to estimate the cost of equity and debt for the firm. This means finding a firm very similar to IMI and using its information to determine the required returns of IMI. After some research, you determine that Tesla is a close match to IMI. You gather the following information about Tesla from finance.yahoo.com and finra-markets.morningstar.com. (use the values provided below, even though they are outdated).

Market price = $250.69 Shares outstanding = 126.40 million Most recent dividend = N/A Beta = 1.16 3-month Treasury bill rate (assume this is an EAR) = 1.0% Market-risk-premium = 0.08 Average yield on Teslas debt = 5.255%

After a board meeting, you have determined that the best course of action will be to raise equity through an IPO (Initial Public Offering) and an additional 5M in debt through a bond issue. The firms tax rate is expected to stay the same at 35%. As well, last years EBIT was $15M, and you expect it to grow at 3% per year indefinitely. The equity value of the firm will be split 51% to a Boycott family trust, 10% to Geoff to cash out when he wants to retire, and 39% available to the public. Assume the bond issue will be used to repay the bank loan in full leaving the firm exactly $5M remaining in bond debt.

Part 3:

a. Calculate the cost of equity for Tesla and use it as the cost of equity for IMI. b. Based on a $5M value of debt, recalculate the unlevered and levered value of IMI. c. Based on the value of the firm calculated in b, how much of the firm is equity? d. If shares of the firm are sold for $25/share, how many shares must be issued? How many shares

will be in the Boycott family trust? How many will Geoff have? How many will be available in the general market?