Excel Online Structured Activity: New Stock Issue

Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has been successful and has enjoyed a positive growth trend. Now B&C is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price for the stock. The company and its investment banks believe that the proper procedure is to conduct a valuation and select several similar firms with publicly traded common stock and to make relevant comparisons. Several jewelry manufacturers are reasonably similar to B&C with respect to product mix, asset composition, and debt/equity proportions. Of these companies, Abercrombe Jewelers and Gunter Fashions are most similar. When analyzing the following data, assume that the most recent year has been reasonably "normal" in the sense that it was neither especially good nor especially bad in terms of sales, earnings, and free cash flows. Abercrombe is listed on the AMEX and Gunter on the NYSE, while B&C will be traded in the Nasdaq market.

Company data	Abercrombe	Gunter	B&C
Shares outstanding	6 million		10 million		500,000
Price per share	$35.00		$54.00		NA
Earnings per share	$2.20		$3.13		$2.60
Free cash flow per share	$1.63		$2.54		$2.00
Book value per share	$14.00		$24.00		$18.00
Total assets	$119 million		$290 million		$12 million
Total debt	$35 million		$50 million		$3 million

The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

1. B&C is a closely held corporation with only 500,000 shares outstanding. Free cash flows have been low and in some years negative due to B&C's recent high sales growth rates, but as its expansion phase comes to an end B&C's free cash flows should increase. B&C anticipates the following free cash flows over the next 5 years:

   Year	1	2	3	4	5
   FCF	1,000,000	1,050,000	1,208,000	1,329,000	1,462,000

   After Year 5, free cash flow growth will be stable at 7% per year. Currently, B&C has no non-operating assets, and its WACC is 12%. Using the free cash flow valuation model, estimate B&C's intrinsic value of equity and intrinsic per share price. Do not round intermediate calculations. Round your answer for the value of equity to the nearest dollar. Round your answer for the value of equity per share to the nearest cent.

   Value of equity	$ fill in the blank 2
   Per share value of equity	$ fill in the blank 3

2. Calculate debt to total assets, P/E, market to book, P/FCF, and ROE for Abercrombe, Gunter, and B&C. For calculations that require a price for B&C, use the per share price you obtained with the corporate valuation model in part a. Do not round intermediate calculations. Round your answers to two decimal places.

   	Abercrombe	Gunter	B&C
   D/A	fill in the blank 4 %		fill in the blank 5 %		fill in the blank 6 %
   P/E	fill in the blank 7		fill in the blank 8		fill in the blank 9
   Market/Book	fill in the blank 10		fill in the blank 11		fill in the blank 12
   ROE	fill in the blank 13 %		fill in the blank 14 %		fill in the blank 15 %
   P/FCF	fill in the blank 16		fill in the blank 17		fill in the blank 18

3. Using Abercrombe's and Gunter's P/E, Market/Book, and Price/FCF ratios, calculate the range of prices for B&C's stock that would be consistent with these ratios. For example, if you multiply B&C's earnings per share by Abercrombe's P/E ratio you get a price. What range of prices do you get? Do not round intermediate calculations. Round your answers to the nearest cent.

   The range of prices: from $ fill in the blank 19 to $ fill in the blank 20