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 $7.41 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 decide 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 4% rather than 3%. What effect would this finding have on your responses in parts a and b? a. The value of Cool Tech's entire company is $. (Round to the nearest dollar.) The value per share of CoolTech's common stock is $. (Round to the nearest cent.) b. On the basis of your finding in part a and the stock's offering price, should you buy the stock? (Select the best answer below.) Yes O No c. If the growth rate in FCF beyond year 4 will be 4% , the value of Cool Tech's entire company will be $. (Round to the nearest dollar.) The value per share of CoolTech's common stock is $ (Round to the nearest cent.) On the basis of your finding in part c and the stock's offering price, should you buy the stock? (Select the best answer below.)
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 $7.41 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 decide 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 4% rather than 3%. What effect would this finding have on your responses in parts a and b? a. The value of Cool Tech's entire company is $. (Round to the nearest dollar.) The value per share of CoolTech's common stock is $. (Round to the nearest cent.) b. On the basis of your finding in part a and the stock's offering price, should you buy the stock? (Select the best answer below.) Yes O No c. If the growth rate in FCF beyond year 4 will be 4% , the value of Cool Tech's entire company will be $. (Round to the nearest dollar.) The value per share of CoolTech's common stock is $ (Round to the nearest cent.) On the basis of your finding in part c and the stock's offering price, should you buy the stock? (Select the best answer below.)
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter9: Stocks And Their Valuation
Section: Chapter Questions
Problem 9TCL
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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
$7.41 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, E
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 4% rather than 3%. What effect would this finding have on your responses in parts a and b?
a. The value of CoolTech's entire company is $. (Round to the nearest dollar.)
The value per share of CoolTech's common stock is $
(Round to the nearest cent.)
b. On the basis of your finding in part a and the stock's offering price, should you buy the stock? (Select the best answer below.)
Yes
No
c. If the growth rate in FCF beyond year 4 will be 4% , the value of CoolTech's entire company will be $
(Round to the nearest dollar.)
The value per share of CoolTech's common stock is $. (Round to the nearest cent.)
On the basis of your finding in part c and the stock's offering price, should you buy the stock? (Select the best answer below.)
Transcribed Image Text:(Click on the icon here a in order to copy the contents of the data table below into a spreadsheet.)
Free cash flow
Year (t)
FCF
Other data
$650,000
$780,000
$910,000
$1,000,000
1
Growth rate of FCF, beyond year 4 = 3%
Weighted average cost of capital = 8%
Market value of all debt = $3,570,000
Market value of preferred stock = $1,430,000
Number of shares of common stock outstanding = 1,100,000
2
4
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