Medibank decided that 2,754 million sh

ares would form the offer through the ASX, a total of 100 per cent

of total shares on issue. The federal government placed

an indicative price range on the offer of $1.55 to $2

per share. On the forecasts for Medibanks FY 2015

earnings, an earnings multiple of 16.5 to 21.3 times

and a dividend yield of 4.2 per cent to 5.4 per cent

were implied by the price range. This price band was

fairly wide (i.e., 30 per cent) and brought with it so

me noteworthy implications, given the uncertainty over

the price that investors would end up paying.

26

The offering price was to be determined followi

ng a book-building process by agreement among the

underwriters, the vendor, and Medibank on the price

discrimination date, which was expected to be

November 25, 2014. Medibank had forecasted fully franke

d dividends of 4.9 cents per share to be paid

starting September 2015, with an implied FY 2015 divide

nd yield of 4.2 per cent to 5.4 per cent. Based on

the indicative price range provided, the Commonwealth

could expect to raise between $4,269 million and

$5,508 million for 100 per cent of Medibanks equity.

27

Additionally, going public provided

a way for Medibank to position the company within the current market

and get its name out to potential investors. It was al

so a strategic way for the

company to increase customer

loyalty and its overall public image

through brand recognition. Going pub

lic gave Medibank an opportunity

to attract other companies to evaluate it for potential

mergers and acquisitions as a way to achieve synergies

and increase overall shareholder value.

Calculate the discount rate

(r)

that is appropriate for a discounted cash flow (DCF)

valuation of Medibank.

Estimate the

price

for Medibanks IPO

stock

by using the discounted cash flow (DCF)

valuation method