Forbes, May 28, 2020 Big Hit Entertainment (BHE), the South Korean company that houses BTS and several other K-pop acts, filed for an initial public offering (IPO). IPO means that the common stock of BHE becomes available in the stock exchange for public trading. After reading this article, you valued BHEs stock.

Financial information for 2019 (Unit: billion won, except for %)

• Sales: 587 EBIT: 105 Depreciation: 5 CAPEX: 25 Net Income: 78.15

• No working capital investment

• Interest Expense*(1-t) = 0.6 Change in net debt = 10 (note the minus sign!)

• Tax rate = 25%, Capital structure and tax rate will remain unchanged.

• Number of shares outstanding = 35,623,760 shares

• (10 pts) Actually, the price of the BHE stock at IPO was determined at 135,000 won per share and some investors said shares were overvalued. (1) Explain possible reason for overvaluation using at least two inputs that you used in the valuation. Your

  answer should be specific to the overvaluation (and not undervaluation).

  (2) Considering the possible problems associated with discounted free cash flow valuation, which alternative valuation method would you recommend? Explain briefly.