Question
Amarindo, Inc. (AMR), is a newly public firm with 10 million shares outstanding. You are doing a valuation analysis of AMR. You estimate that AMR
Amarindo, Inc. (AMR), is a newly public firm with 10 million shares outstanding. You are doing a valuation analysis of AMR. You estimate that AMR will earn a free cash flow of $15 million in perpetuity. Because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of AMRs equity beta. However, you do have beta data for UAL, another firm in the same industry:
Equity Beta Debt Beta Debt-Equity Ratio
UAL 1,5 0,3 1
AMR has a much lower debt-equity ratio of 0.3, which is expected to remain stable, and its debt is risk free. AMRs corporate tax rate is 40%, the risk-free rate is 5%, and the expected return on the market portfolio is 11%.
(a) Estimate AMRs equity cost of capital.
(b) Calculate AMRs share price.
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