Financial Accounting You are working on the valuation for an upcomingIPO. The company that wants to sell its stockexpects the following future free cash flows: -$7million in year 1, $8 million in year 2, and $19million in year 3; cash flows are expected to growsteadily at 5.6% after year 3. The discount rate forthis company is 11.1%, and it plans to sell 9million shares. What should be the price pershare?

Step 1: Define SharesShares are the portion of a company that collectively represents the equity and…

Answered: You are working on the valuation for an…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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What should be the price per share?
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A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company's equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target's cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 5 1 $38 Free cash flows 2 3 4 $53 $58 $63 $ 63 $ 756 Selling price Total free cash flows $38 $53 $58 $63 $819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk premium 5 percent a. Estimate the target firm's…
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