Zaap Company is a privately held start-up that offers inventory management services to clients. The firm plans to sell its shares to the public within next18 months and wants to get some idea about what the firm’s stock will be worth. An investment banker who specializes in assisting high-tech start-ups to go public has evaluated and developed the following data:
Years
1 2 3 4
Sales 100,000 115,000 132,250 132,250
Operating Income ( EBIT) 16,000 18,400 21,160 21,160
Tax rate is 30%.
Less ınvestments:
Investment in net working
capital 1,695.65 1,950 2,242.50 -------
Capital expenditures(CAPEX) 2,347.83 2,700 3,105 -------
The company will grow at a rate of 15 % during the first two years and no growth in sales is foreseen thereafter. Furthermore the firm’s investment banker had done a study of the firm’s cost of capital and estimated the weighted average cost of capital to be 12%.
a. Estimate the free cash flows for the four years. Assume year 4 cash flows will continue indefinitely.
b. What is the value of Zaap Company based on these estimates?
c. If Zaap.Com has 2,000 shares of common stock outstanding and liabilities valued at $ 4,000, what is the value per share of its stock?