Case in point: Sumit Power Company Limited's initial public offering (IPO).

Background information:

It's November of last year. Sumit Power Company Limited's management team and Board of Directors have hired one of our country's leading asset management firms to help them determine the company's next moves. The Board of Directors and Management discuss and assess Sumit's strategic strategy, long-term objectives, results, and opportunities on a regular basis as part of the company's ongoing management and oversight. During these discussions, the Board of Directors and senior management agreed to increase the company's power generation capacity by 200 MW in order to achieve the company's long-term target of being the country's largest power generation company. In order to raise BDT 600 million for the upcoming project, the board and senior management have also agreed to go for 100% equity funding through a public offering.

Profile of the Company:

Sumit Power Company Limited (SPCL) has set up three power plants for generating and supplying 300 MW electricity to Bangladesh Power Developments Board (BPDB) under three power purchase agreements signed by the company with BPDB for selling 100 MW from Shatkhira plant, 150 MW from Khulna plant and with REB for selling 50 MW from Comilla plant for a period of 15 years. SPCL has taken steps to build more power plants in other parts of the country and to increase its power generation capacity by 200 MW in order to provide uninterrupted electricity to the vast majority of the country for their personal, social, and economic growth. Sumit's goal is to become one of the nation's leading power generation companies by building more power plants across the region. The company's operations are not influenced by seasonal variations in general, but the demand for electricity is typically higher in the summer and irrigation season compared to the winter season.

Prospects for the Industry:

In recent years, the power sector has become increasingly important for both the government and the private sector in Bangladesh. With a population of 163 million people, Bangladesh's electricity grid currently serves a little more than two-thirds of the country's population. A close examination of the country's power sector growth reveals that each year, a 500 MW increase in power generation is needed to meet rising demands. The Government of Bangladesh (GOB) provides subsidized electricity to its people. The amount of subsidy that the GOB spends per year rises in accordance with the rise in electricity demand and generation. As a result, the GOB must consider price rises to bring the price in line with the cost of electricity in order to address this problem.

The power sector has made remarkable progress in recent years.

Bangladesh's power demand is expected to increase to 34,000 MW by 2030. Bangladesh's government, on the other hand, plans to boost the country's fast-growing economy by increasing power generation capacity beyond projected demand to 39,000 MW by 2030. This would entail increased domestic consumption in proportion to population growth, as well as an increase in purchasing power, industrialization, new connections, and the use of modern electrical appliances.

Your Function:

Sumit Power Company Limited has asked you to prepare a quantitative analysis report as part of a proposal to be submitted to the Bangladesh Securities and Exchange Commission (BSEC) in order to obtain permission to begin the IPO process, which requires you to develop your views on the current and future capital structure as well as determine the fair value of the company's stock. In your analysis, your Managing Director has requested that you answer the following question:

1. Determination of the initial public offering (IPO) offer price with justification

Assumptions:

Effective Tax Rate: 25%

Risk-free Rate (BD 10-Yr Treasury Yield): 6.94%

Pre-Tax Cost of Debt: 11.50%

Bangladesh Historical Equity Risk Premium: 7.20%

Terminal Growth Rate: 3.02%

Current Interest Rate: 10.00%

Furthermore, you have gathered the following information:

Sumit's free cash flows are BDT 3 million, BDT 6 million, BDT 8 million, and BDT 16 million for the next four years. Free cash flow can rise at the terminal growth rate after the fourth year. Sumit has a weighted average cost (WACC) of capital of 9%, a market value of BDT 75 million in debt, BDT 15 million in non-operating assets, and plans to sell 7.5 million shares of common stock.

1. Determination of the initial public offering (IPO) offer price with justification