Question
Suppose you work as an Equity Research Analyst for the Teachers Retirement Pension Fund. Your fund is offered to purchase TechRevolution public offering at $5.50
Suppose you work as an Equity Research Analyst for the Teachers Retirement Pension Fund. Your fund is offered to purchase TechRevolution public offering at $5.50 per share. While your funds manager is very interested in this stock, he also wants to make sure the fund pays a fair price per share, so he asked you to determine the fundamental price of the firms stock. Using various sources, you gathered the following information about TechRevolution :
| Year | Free cash flow (FCF forecast), $ | Other data |
| 2019 | 700,000 | FCF growth rate (2023 to ) = 3% per year |
| 2020 | 735,000 | Weighted average cost of capital = 10% per year |
| 2021 | 765,000 | Market value of companys debt = $4,000,000 |
| 2022 | 790,000 | Market value of preferred stock = $0 |
|
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| Common shares outstanding = 1,500,000 |
Use the discounted free cash flow valuation approach to estimate the companys price per share. Make sure to include the terminal free cash flow in your calculations.
Given the price you found in part (a) and the asking price per share, should you buy this companys stocks? Explain why yes/no
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Investment Analysis And Portfolio Management
Authors: Frank K. Reilly, Keith C. Brown
7th Edition
0324171730, 978-0324171730
