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Personal Finance ProblemAssume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $12.37 per share. Although you

Personal Finance ProblemAssume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for

$12.37 per share. Although you are very much interested in owning the company, you are concerned about whether it is fairly priced. To determine the value of the shares, you have decided to apply the free cash flow valuation model to the firm's financial data that you've accumulated from a variety of data sources. The key values you have compiled are summarized in the following table,

2020 720,000 2021 860,000 2022 980,000 2023 1,100,000

Growth rate of FCF, beyond

2023

to

infinity=6%

2021

$860,000

Weighted average cost of

capital=11%

2022

$980,000

Market value of all

debt=$3,630,000

2023

$1,100,000

Market value of preferred

stock=$1,450,000

Number of shares of common stock to be issued=1,100,000

.

a. Use the free cash flow valuation model to estimate CoolTech's common stock value per share.

b.Judging by your finding in part a and the stock's offering price, should you buy the stock?

c. On further analysis, you find that the growth rate in FCF beyond

2023

will be

7%

rather than

6%.

What effect would this finding have on your responses in parts a and

b?

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