5. XYZ corporation is doing IPO, and you, a stock analyst in Goldman Sachs IBD,

Question

5. XYZ corporation is doing IPO, and you, a stock analyst in Goldman Sachs IBD, are helping them figure out the IPO price. The company is offering 1 dollar dividend the first year, and then with a skyrocketing 50% growth rate for 3 years. After that the company is slowing down to a 5% growth rate. Your colleague from the risk management department tells you that the company will have a beta of 3 in the years, and a beta of 1.5 for the rest of the years. Assume that the risk-free rate is always 2% and market portfolio return is always 8% Calculate the fair price at the IPO of this company. first 2

Explanation / Answer

required return for the first two years = 2% + 3*8% = 26%

required rate after two years = 2% + 1.5*8% = 14%

Cash flows are as follows :

fair value of the stock = 1/1.26 + 1.5/1.262 + 2.25/(1.262*1.14) + (3.38+39.38)/(1.262*1.142)

fair value of the stock = 23.71

Cash flows Year                            -   0                       1.00 1                       1.50 2                       2.25 3                       3.38 4                     39.38 4

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