**Using the Free Cash Flow Valuation Model to Price an IPO**Assume you have an opportunity to buy the stock of CoolTech, Inc., which is being offered as an IPO at $22.92 per share. To assess its fair pricing, you apply the free cash flow valuation model to the company’s financial data. The key values are summarized in the table below.**Tasks:**a. Use the free cash flow valuation model to estimate CoolTech’s common stock value per share.b. Based on your findings in part a and the offering price, decide if you should buy the stock.c. Evaluate the effect of a 7% growth rate in FCF beyond 2023, instead of 6%. How does this affect your previous responses?**Data Table:**- **Free Cash Flow (FCF):** - 2020: $680,000 - 2021: $780,000 - 2022: $880,000 - 2023: $970,000- **Other Data:** - Growth rate of FCF beyond 2023 to infinity: 6% - Weighted average cost of capital: 8% - Market value of all debt: $8,100,000 - Market value of preferred stock: $3,240,000 - Number of shares of common stock to be issued: 1,100,000**Question:**The value of CoolTech's entire company is _____ (Round to the nearest dollar).

Free cash flow is the sum left over after covering capita expenditure and operating expenses. It is…

Answered: The value of CoolTech's entire company…

Business

Finance

The value of CoolTech's entire company is $. (Round to the nearest dollar.)

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

**Using the Free Cash Flow Valuation Model to Price an IPO**

Assume you have an opportunity to buy the stock of CoolTech, Inc., which is being offered as an IPO at $22.92 per share. To assess its fair pricing, you apply the free cash flow valuation model to the company’s financial data. The key values are summarized in the table below.

**Tasks:**

a. Use the free cash flow valuation model to estimate CoolTech’s common stock value per share.

b. Based on your findings in part a and the offering price, decide if you should buy the stock.

c. Evaluate the effect of a 7% growth rate in FCF beyond 2023, instead of 6%. How does this affect your previous responses?

**Data Table:**

- **Free Cash Flow (FCF):**
- 2020: $680,000
- 2021: $780,000
- 2022: $880,000
- 2023: $970,000

- **Other Data:**
- Growth rate of FCF beyond 2023 to infinity: 6%
- Weighted average cost of capital: 8%
- Market value of all debt: $8,100,000
- Market value of preferred stock: $3,240,000
- Number of shares of common stock to be issued: 1,100,000

**Question:**

The value of CoolTech's entire company is _____ (Round to the nearest dollar).

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