New Stock Issue Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has

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New Stock Issue

Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has been successful and has enjoyed a positive growth trend. Now B&C is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price for the stock. The company and its investment banks believe that the proper procedure is to conduct a valuation and select several similar firms with publicly traded common stock and to make relevant comparisons.
Several jewelry manufacturers are reasonably similar to B&C with respect to product mix, asset composition, and debt/equity proportions. Of these companies, Abercrombe Jewelers and Gunter Fashions are most similar. When analyzing the following data, assume that the most recent year has been reasonably "normal" in the sense that it was neither especially good nor especially bad in terms of sales, earnings, and free cash flows. Abercrombe is listed on the AMEX and Gunter on the NYSE, while B&C will be traded in the Nasdaq market.

B) Calculate debt to total assets, P/E, market to book, P/FCF, and ROE for Abercrombe, Gunter, and B&C. For calculations that require a price for B&C, use the per share price you obtained with the corporate valuation model in part a. Round your answers to two decimal places. Round ROE to one decimal place.

C.) Using Abercrombe's and Gunter's P/E, Market/Book, and Price/FCF ratios, calculate the range of prices for B&C's stock that would be consistent with these ratios. For example, if you multiply B&C's earnings per share by Abercrombe's P/E ratio you get a price. What range of prices do you get? Round your answers to the nearest cent.

The range of prices:
from $ _____ to $ _______?

Please label all of the anwers.

New Stock Issue

Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has been successful and has enjoyed a positive growth trend. Now B&C is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price for the stock. The company and its investment banks believe that the proper procedure is to conduct a valuation and select several similar firms with publicly traded common stock and to make relevant comparisons.
Several jewelry manufacturers are reasonably similar to B&C with respect to product mix, asset composition, and debt/equity proportions. Of these companies, Abercrombe Jewelers and Gunter Fashions are most similar. When analyzing the following data, assume that the most recent year has been reasonably "normal" in the sense that it was neither especially good nor especially bad in terms of sales, earnings, and free cash flows. Abercrombe is listed on the AMEX and Gunter on the NYSE, while B&C will be traded in the Nasdaq market.

Company data Abercrombe Gunter B&C Shares outstanding 5 million 12 million 500,000 Price per share $32.00 $47.00 NA Earnings per share $2.20 $3.13 $2.60 Free cash flow per share $1.63 $2.54 $2.00 Book value per share $14.00 $22.00 $18.00 Total assets $105 million $314 million $11 million Total debt $35 million $50 million $4 million A) B&C is a closely held corporation with only 500,000 shares outstanding. Free cash flows have been low and in some years negative due to B&C's recent high sales growth rates, but as its expansion phase comes to an end B&C's free cash flows should increase. B&C anticipates the following free cash flows over the next 5 years: Year 1 2 3 4 5 FCF 1,000,000 1,050,000 1,208,000 1,329,000 1,462,000

After Year 5, free cash flow growth will be stable at 7% per year. Currently, B&C has no non-operating assets, and its WACC is 12%. Using the free cash flow valuation model, estimate B&C's intrinsic value of equity and intrinsic per share price. Round your answers for the value of equity to the nearest dollar and for the value of equity per share to the nearest cent. Value of equity $ __________? Per share value of equity $ __________?

B) Calculate debt to total assets, P/E, market to book, P/FCF, and ROE for Abercrombe, Gunter, and B&C. For calculations that require a price for B&C, use the per share price you obtained with the corporate valuation model in part a. Round your answers to two decimal places. Round ROE to one decimal place.

Abercrombe Gunter B&C D/A ________% ______ % ______% P/E _________ ______ ________ Market/Book _________ _______ ________ ROE ________% _______% ________% P/FCF _________ _________ ________

C.) Using Abercrombe's and Gunter's P/E, Market/Book, and Price/FCF ratios, calculate the range of prices for B&C's stock that would be consistent with these ratios. For example, if you multiply B&C's earnings per share by Abercrombe's P/E ratio you get a price. What range of prices do you get? Round your answers to the nearest cent.

The range of prices:
from $ _____ to $ _______?

Explanation / Answer

(A):   Estimate B&C's intrinsic value of equity and intrinsic per share price:

Intrinsic value of equity = Total business value - Debt value

   = $31286800 - $4000000

   = $ 27286800

Intrinsic per share price = $ 27286800 / 500000 shares

= $ 54.57 per share

Note: Total business value = free cash flow after 5 year / (WACC - Free cash flow growth rate)

= $1564340 / (12% - 7%)

   = $ 31286800

Free cash flow after 5 year will be stable at 7% per year

Free cash flow after 5 year = $1462000 + ( $1,462,000 * 7%)

= $1462000 + $102340

   = $1564340

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