Determining the price of an IPO is challenging with no existing public market price for the shares. One method to determine the price is the present value of the FCF. Use the following data for each of question 1 through 4 below, to calculate a theoretical stock price for the IPO of ABC Corp. The model is based on five years of forecasts + a terminal value. The firms discount rate is 7%. Free cash flow (FCF) is estimated for Year 0 at $125 million. FCF is estimated to grow at 17.5% per year for the first five years. Calculate the PV of the FCF for each of years 1, 2, 3, 4 and 5 individually (Label the year, provide the FCF and then provide the PV of the FCF).

Terminal Value of the firms cash flows must be calculated. From Year 6 onwards, the firms FCF will grow at 4.5%. Calculate the Terminal Value in Year 5 and the PV of the terminal value.

What is the gross value of the firm today?

The firm as 525,000,000 shares outstanding. What is your estimate of the IPO price per share of the firm?

What is an alternative method for determining a share price for an IPO? Please be specific and discuss how the method would be carried out.