Using the free cash flow valuation model to price an IPOPersonal Finance ProblemAssume that you have an opportunity to buy the stock ofCoolTech, Inc., an IPO being offered for $10.95 per share. Although you are very much interested in owning thecompany, you are concerned about whether it is fairly priced. To determine the value of theshares, you have decided to apply the free cash flow valuation model to thefirm's financial data thatyou've accumulated from a variety of data sources. The key values you have compiled are summarized in the followingtable,

.Free cash flow

Year(t) FCFOt her data

1 $720,000 Growth rate ofFCF, beyond year 4=2%

2 $810,000 Weighted average cost of capital=12%

3 $920,000 Market value of all debt=$1,910,000

4 $1,070,000 Market value of preferred stock=$760,000

Number of shares of common stock outstanding=

a. Use the free cash flow valuation model to estimateCoolTech's common stock value per share.

b.Judging by your finding in part a and thestock's offeringprice, should you buy thestock?

c. On furtheranalysis, you find that the growth rate in FCF beyond year 4 will be 3% rather than 2%. What effect would this finding have on your responses in parts a and b?

Q:

1. The value ofCoolTech's entire company is $ ....?(Round to the nearestdollar.)

The value per share ofCoolTech's common stock is $....?(Round to the nearestcent.)

2.On the basis of your finding in part a and thestock's offeringprice, should you buy thestock?(Select the best answerbelow.)

Yes or No?

3. If the growth rate in FCF beyond year 4 will be 3% , the value ofCoolTech's entire company will be $....?(Round to the nearestdollar.)

The value per share ofCoolTech's common stock is $....??? (Round to the nearestcent.)

On the basis of your finding in part c and thestock's offeringprice, should you buy thestock? (Select the best answerbelow.)

Yes or No?