Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $10.78 per share. Although you are very much interested in owning the company, you are concerned about whether it is fairly 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 accumulated 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 by 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 year 4will be 5% rather than 4%. What effect would this finding have on your responses in parts a and b?
Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $10.78 per share. Although you are very much interested in owning the company, you are concerned about whether it is fairly 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 accumulated 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 by 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 year 4will be 5% rather than 4%. What effect would this finding have on your responses in parts a and b?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $10.78 per share. Although you are very much interested in owning the company, you are concerned about whether it is fairly priced. To determine the value of the shares, you have decided to apply the
a. Use the free cash flow valuation model to estimate CoolTech's common stock value per share.
b. Judging by 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 year 4will be 5% rather than 4%. What effect would this finding have on your responses in parts a and
b?
![(Click on the icon here in order to copy the contents of the data table below into a spreadsheet.)
Free cash flow
Year (t)
1234
FCF
$720,000
$800,000
$910,000
$1,050,000
Other data
Growth rate of FCF, beyond year 4 = 4%
Weighted average cost of capital = 9%
Market value of all debt = = $3,650,000
Market value of preferred stock = $1,460,000
Number of shares of common stock outstanding = 1,100,000](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3c3c150e-144d-4e26-af5c-80cf02fa7b06%2Fab30c9c0-065c-44a8-b399-295a6f9b6877%2Fog2of8t_processed.png&w=3840&q=75)
Transcribed Image Text:(Click on the icon here in order to copy the contents of the data table below into a spreadsheet.)
Free cash flow
Year (t)
1234
FCF
$720,000
$800,000
$910,000
$1,050,000
Other data
Growth rate of FCF, beyond year 4 = 4%
Weighted average cost of capital = 9%
Market value of all debt = = $3,650,000
Market value of preferred stock = $1,460,000
Number of shares of common stock outstanding = 1,100,000
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VIEWStep 2: computation of terminal value if growth rate is 4%.
VIEWStep 3: computation of value of firm.
VIEWStep 4: answer to part a and part b.
VIEWStep 5: computation of terminal value if growth rate is 5%.
VIEWStep 6: computation of value of firm if growth rate is 5%.
VIEWStep 7: answer to part c.
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