Question
Use the free cash flow valuation model to estimate CoolTechs common stock value per share. b. Judging on the basis of your finding in part
Use the free cash flow valuation model to estimate CoolTechs common stock value per share. b. Judging on the basis of your finding in part a and the stocks offering price, should you buy the stock? c. On further analysis, you find that the growth rate in FCF beyond 2019 will be 3% rather than 2%. What effect would this finding have on your responses in parts a and b?Using the free cash flow valuation model to price an IPO Assume that you have an
opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $12.50 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 firms financial data
that youve developed from a variety of data sources. The key values you have compiled
are summarized in the following table.
| Year (t) FCFt Other data | |
| 2016 $ 700,000 Growth rate of FCF, beyond 2019 to infinity 5 2% | |
| 2017 800,000 Weighted average cost of capital 5 8% | |
| 2018 950,000 Market value of all debt 5 $2,700,000 | |
| 2019 1,100,000 Market value of preferred stock 5 $1,000,000 | |
| Number of shares of common stock outstanding 5 1,100,000 |
|
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Principles of Managerial Finance
Authors: Chad J. Zutter, Scott B. Smart
15th edition
013447631X, 134476315, 9780134478197 , 978-0134476315
