Question 3

Amarindo, Inc. (AMR), is a newly public firm with 9.5 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be $14.73 million, and you expect the firm's free cash flows to grow by 4.3% per year in subsequent years. Because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of AMR's equity beta. However, you do have beta data for UAL, another firm in the same industry: 3. AMR has a much lower debt-equity ratio of 0.39, which is expected to remain stable, and its debt is risk free. AMR's corporate tax rate is 35%, the risk-free rate is 4.6%, and the expected return on the market portfolio is 11.1%. a. Estimate AMR's equity cost of capital. b. Estimate AMR's share price. a. Estimate AMR's equity cost of capital. The equity cost of capital is 12.62 %. (Round to two decimal places.) Data table (Click on the following icon o in order to copy its contents into a spreadsheet.) Equity Beta 1.95 Debt Beta 0.39 Debt-Equity Ratio 1.3 UAL Print Done