Question
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
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.
a. 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?
Free cash flow
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
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started