Question 3 15 marks

Roban Corporation is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Roban have decided to make their own estimate of the companys ordinary share value. The companys CFO has gathered data for performing the valuation using the free cash flow valuation model.

The companys weighted average cost of capital is 10%, and it has R1 400 000 of debt at the market value and R500 000 of preferred shares at its assumed market value. The estimated free cash flows over the next five years, 2021 through 2025, are given below. Beyond 2025 to infinity, the company expects its free cash flow to grow by 5% annually.

Year (t) 2021 2022 2023 2024 2025 Free cash flow (FCFt) (In rands) R250 000 290 000 320 000 360 000 400 000 3.1. 3.2. Estimate the value of Roban Corporation's entire company by using the free cash flow approach. (7) Use your finding in part (3.1), along with the data provided above, to find Roban Corporation's ordinary share value. (4) If the company plans to issue 300 000 ordinary shares, what is its estimated value per share? (4) 3.3