Problem 3

Tradeco is considering an IPO and hires an investment bank to conduct an analysis for its firm value. Below are some to the assumptions

• Steady state will be reached at year 4(hence the forecast period is from year 1-3)
• Revenue for Tradeco is 50M for year 0 and is growing at 10% during the forecast period
• Cogs is 40% of the sales and SG&A is 20% of the sales
• Net PP&E at year 0=20M
• NWC turnover=3 each year
• Capital expenditure per year = 3M
• Depreciciation per year = 2M
• Steady state growth rate is assumed to be 2.5%
• Estimated # of shares = 10M
• Debt value = 50M
• Tax rate =40%
• WACC is 10%

What is the per share value of Tradeco based on the DCF method? Please estimate the terminal value using the perpetual growth method