Amarindo, Inc. (AMR), is a newly public firm with

11.0

million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be

$14.87

million, and you expect the firm's free cash flows to grow by

3.6%

per year in subsequent years. Because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of AMR's equity beta. However, you do have beta data forUAL, another firm in the same industry:

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. AMR has a much lower debt-equity ratio of

0.27,

which is expected to remain stable, and its debt is risk free. AMR's corporate tax rate is

40%,

the risk-free rate is

5.3%,

and the expected return on the market portfolio is

11.1%.

a. Estimate AMR's equity cost of capital.

b. Estimate AMR's share price.

Equity Beta 1.35 Debt Beta 0.27 Debt-Equity Ratio 0.9 UAL