IO Taxes Inc. is a large but privately-held all-equity firm in the tax planning industry. The firm
Question:
IO Taxes Inc. is a large but privately-held all-equity firm in the tax planning industry. The firm has been enjoying a nice 20% annual growth in its FCFE due to the highly anticipated increase in taxes related to the massive baby-boomers retirement wave. IOs FCFE is expected to be $5 million next year. The growth rate is expected to be the same for an additional year after that and then management expects the FCFEs growth rate to cool down to 4% in perpetuity.
IO Taxes has 10 million shares outstanding and it has $10 million in non-operating cash (invested mostly in Treasury bills).
While IO Taxes is not publicly traded, its close competitor, H&R Rock Inc., is and has an unlevered and unadjusted equity beta of 1.3.
Additional market information:
Market risk premium: 5.2%
T-bond yield: 2.25%
a. Based on the available information, please estimate IOs cost of equity.
b. Estimate the intrinsic value of each share of stock.