Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Free cash flow Year (t) 1 234 FCF $660,000 $790,000 $900,000 $1,010,000 Other data Growth rate of FCF, beyond year 4 = 2% Weighted average cost of capital = 12% Market value of all debt = $1,810,000 Market value of preferred stock = $720,000 Number of shares of common stock outstanding = 1,100,000 Print Done X
Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Free cash flow Year (t) 1 234 FCF $660,000 $790,000 $900,000 $1,010,000 Other data Growth rate of FCF, beyond year 4 = 2% Weighted average cost of capital = 12% Market value of all debt = $1,810,000 Market value of preferred stock = $720,000 Number of shares of common stock outstanding = 1,100,000 Print Done X
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
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Question
Transcribed Image Text:Using the free cash flow valuation model to price an IPO Personal Finance Problem Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered
for $4.61 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 4 will be 3% rather than 2%. What effect would this finding have on your responses in parts a and b?
a. The value of CoolTech's entire company is $
Data table
(Click on the icon here in order to copy the contents of the data table below into a spreadsheet.)
Free cash flow
Year (t)
1
2
3
4
FCF
(Round to the nearest dollar.)
$660,000
$790,000
$900,000
$1,010,000
Other data
Growth rate of FCF, beyond year 4 = 2%
Weighted average cost of capital = 12%
Market value of all debt = $1,810,000
Market value of preferred stock = $720,000
Number of shares of common stock outstanding = 1,100,000
Print
Done
X
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