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mathxl.com Assignments Take a Test Claudia Torres Mathxl.com Assignments Take A Test Claudia Torres... I Chegg.com FINA3313 Fall 2017 (1) Claudia Torres | 12/15/17 12:08 AM Quiz: Practice Questions Chapter 7 (Module 3: Stock Valuation) Submit Quiz This Question: 1 pt 14 of 115 complete) This Quiz: 17 pts possible Question Help Using the free cash flow valuation model to price an IPO Personal Finance Problem Assume that it is the end of year 2015 and you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $5.66 per share. Although you are very much interested in owning the company, you are concerned about whether it is faily priced. To determine the value of the shares, you have decided to apply the free cash flow valuation model to the firm's financial data that you've 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 CoolTech's common stock value per share. b. Judging on the basis of your finding in part a and the stock's offering price, should you buy the stock? c. On further analysis, you find that the growth rate in FCF beyond 2019 will be 5% rather than 4%. What effect would this finding have on your responses in parts a and b? a. The value of CoolTech's entire company is S (Round to the nearest dollar.) The value per share of CoolTech's common stock is $1 (Round to the nearest cent.) b. On the basis of your finding in part a and the stock's offering price, should you buy the stock? (Select the best answer below.) Data Table (Click on the icon located on the top-right comer of the data table below in order to copy its contents into a O Yes O No Free cash flow Year (t) 2016 2017 2018 2019 FCF Other data c. If the growth rate in FCF beyond 2019 will be 5% . the value of CoolTech's entire company will be $ (Round to the nearest dollar The value per share of CoolTech's common stock is S(Round to the nearest cent.) On the basis of your finding in part c and the stock's offering price, should you buy the stock? (Select the best answer below.) $730,000 $810,000 $950,000 $1,080,000 | | | | Growth rate of FCF. beyond 2019 to infinity. 4% Weighted average cost of capital = 13% Market value of all debt-$2,050,000 Market value of preferred stock = $820,000 Number of shares of common stock to be issued= 1,100,000 OA. No O B. Yes PrintDone Click to select your answer(s).

Explanation / Answer

Soln : Using the cash flow method, first we calculate the Terminal value in 2019 afterwards which the growth rate is 4%

perpetuity value in 2019 = 1080000*(1.04)/(0.13-0.04) = $12480000

Now, please refer the table for Total PV:

(a) We can say that the above given value is actually the business value or enterprise value = $9592982

Now, to calculate the value of equity need to calculate the equity part, E = Business value - market value of debt - market value of preffered stock

E = 9592982 - 2050000-820000 = $6722982

Inrinsic value per share based on cash flows = E/no. of outstanding shares = 6722982/1100000 = $6.11

(b) IPO value given = $5.66, Yes, it is an opportunity to buy now and sell it once it reaches the intrinsic value.

(c) In case if the growth rate is 5% instead of 4% , then the terminal value at 2019 = $14175000

And the business value will be = $10632557,

again the Equity value,E = $7762557 and intrinsic share value = E/110000 = $7.06

Hence, yes buy the stock.

Year 2016 2017 2018 2019 FCF 730000 810000 950000 12480000 WACC 1.13 1.13 1.13 1.13 PV 646017.7 634348.8 658397.7 7654218 Total 9592982

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