Terence Mann is considering buying some shares of common stock of an initial pub

Question

Terence Mann is considering buying some shares of common stock of an initial public offering by NewAge Communications Corporation. The privately held company is going public by issuing 2 million new shares at $20 per share. Terence gathered the following information about NewAge: The required rate of return for Terence from a share of common stock for this type of company is 13 percent Compare the selling price of the stock with its value as obtained from different. valuation methods. Would you recommend that Terence buy the stock? 1. Book Value Approach: Book Value / # of Shares 2. Liquidation Value Approach: Liquidation Value I # of Shares 3. Replacement Value Approach: Replacement Value / # of Shares 4. Dividend Growth Model: D1/(r-g)

Explanation / Answer

1. Book Value approch

= Net Book value/ no. of shares

=($200Million-150million)/ $3Million

= $ 16.67 Per share

2. Liquidation value approch

= Net Estimated liquidation value/ no. of shars

= (250 Million- 150 Million)/ 3Million

= $ 33.33  Per share

3. Replacement value approch

= Net Replacement value / no. of shares

= (400 Million- 150 Million)/ 3 Million

= $ 83.33  Per share

4. Dividend growth model

= D1 / e-g

= 2 (1.08)/ .13-.08

= $ 43.2 Per share

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