Question
You are the Investment Manager of a major institutional investor and you are evaluating the Nepal Software company that is going public. This company currently
You are the Investment Manager of a major institutional investor and you are evaluating the Nepal Software company that is going public. This company currently has US$1 billion in revenue last year and is expected to grow 3% annually in perpetuity. The company generated US$30 million in operating income[EBIT * (1 - t)] last year and the operating margin is expected to double in the next 3 years (in equal annual increases). The company will have a depreciation of US$20 million and a fixed capital investment of US$15 million on a permanent basis. Assume that from year 3 onward, the company's cash flow grows at a rate of 5% per year.
Also, the company has a debt of US$150 million and they must pay US$7.5 million in annual interest.
Given the type of business, analysts recommend having a Debt / Equity ratio equal to 60%. On the other hand, it is known that the market return is 15% and the beta coefficient in the similar stock market is 1.5 and the risk-free rate (Rf) is 3%. Using the above data, calculate the Nepal Software share price. Suppose you want to issue 100 million shares. (Note: the tax rate "t" is 20%)
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