Joe, after talking to his MBA classmates, realized that his forecast of dividend payout might be too aggressive and it is by nature very difficult to forecast dividend of an IPO company due to lack of dividend history. So he decided to try the free cash flow model as a company's free cash flows are not directly affected by dividend policy. He checked his notes from the finance class he took at the business school and understand that the firm's total value can be estimated as the sum of its discounted free cash flows in the future. Free cash flows were estimated by subtracting the firm's net capital spending and the change in net working capital from the year's operating cash flows and were discounted at the firm's overall cost of capital (or weighted average cost of capital). The firm's market value of equity was then calculated by subtracting the firm's outstanding debt owed to creditors (i.e., long-term debt) from the overall firm value. Since their debt is not traded in the market, Joe used the book value of debt. He also noted that current liabilities are not considered as part of capital structure and so are not considered as debt. Joe decided to use interest rate on their long-term debt to proxy for cost of debt. To calculate the weighted average cost of capital, he relied on book values of equity and debt in 2014. He continued to use 13.73% as the cost of equity.

Questions: 1. Joe first calculate the free cash flows in 2014 and used it as the base to forecast future free cash flow. He used similar assumptions in his dividend discount model and assumed that the firm's free cash flows would grow at a rate of 30% next year and for another three years, 20% thereafter for two years, and then finally settle down to a long-term growth rate of 6% thereafter. He estimated net capital spending in 2014 as the sum of depreciation in 2014 and the change in fixed asset (from 2013). Based on this approach, what would Citrus Glow's selling prices per share be if they were to issue 30 million shares?

2. Dan looked at Joe's assumption and he think Joe is too optimistic about the growth of the company. He suggests Joe to try more modest assumptions of the growth rate: 30% during the first year, 20% during the second year, and then settle down to a long-term growth rate of 6% thereafter. Under this assumption, what would be the price per share if everything else stays the same?

3. Are you surprised by the difference of the two estimates under different assumptions? Discuss why or why not. 4. Consider all the three approaches (including the comparables approach and dividend discount model you worked last time), what is your favorite approach? Why?