Scribd
Upload
120 views7 pages

Case of 7-17 - Syndicate Group 4 - SLEMBA BPOM1

The document presents a case solution for evaluating whether to buy stock in CoolTech, Inc. that is going public at $12.50 per share. [1] Using a free cash flow valuation model, the estimated value of CoolTech's common stock is calculated to be $11.76 per share, so it was initially determined not to buy the stock. [2] However, upon further analysis finding the growth rate in free cash flow will be 3% rather than the original 2%, the common stock value is recalculated to be $14.41 per share. [3] This changes the recommendation to buy the shares since the offering price is now lower than the estimated value.

Uploaded by

Fadhila Hanif
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
120 views7 pages

Case of 7-17 - Syndicate Group 4 - SLEMBA BPOM1

The document presents a case solution for evaluating whether to buy stock in CoolTech, Inc. that is going public at $12.50 per share. [1] Using a free cash flow valuation model, the estimated value of CoolTech's common stock is calculated to be $11.76 per share, so it was initially determined not to buy the stock. [2] However, upon further analysis finding the growth rate in free cash flow will be 3% rather than the original 2%, the common stock value is recalculated to be $14.41 per share. [3] This changes the recommendation to buy the shares since the offering price is now lower than the estimated value.

Uploaded by

Fadhila Hanif
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 7

SYNDICATE GROUP 4

P7–17 Case Solution 29320071 - Putra Gusrianto


29320115 - Anggia Saniagati
29320130 - Rahajeng Puput Aryani
29320149 - Fadhila Nurfida Hanif
The Case

Assume that you have an opportunity to buy the stock of CoolTech, Inc.,
an IPO being offered for $12.50 per share.
A. Estimate CoolTech’s common stock
value per share with free cash flow valuation model

Calculate the present value of the free cash flow occurring from the end of 2020 to infinity, measured at the beginning
of 2020 (that is, at the end of 2019). Because a constant rate of growth in FCF is forecast beyond 2019, we can use the
constant-growth dividend valuation model (Equation 7.4) to calculate the value of the free cash flows from the end of
2021 to infinity:

Value of FCF2020 to infinity =  =  ¿  $ 𝟏𝟖 ,𝟕𝟎𝟎 , 𝟎𝟎𝟎

The present value of the FCF from 2020 to infinity, which is measured at the end of 2019, to the 2019 FCF value to get
the total FCF in 2019:

Total FCF2019 ¿  $ 1,100,000+ $ 18,700,00=$ 𝟏𝟗 ,𝟖𝟎𝟎 ,𝟎𝟎𝟎


Find the sum of the present values of the FCFs for 2016 through 2019 to determine the value of the entire company
(VC). This calculation is shown in this table:
Present Value of
Year (t) FCF PVIF 8%,t
FCFt
2016 $ 700,000 0.926 $ 648,200
2017 $ 800,000 0.857 $ 685,600
2018 $ 950,000 0.794 $ 754,300
2019 $ 19,800,000 0.735 $ 14,553,000
Value of entire company $ 16,641,100

Value of the common stock


Value of the common stock = value of the entire company - the market value of all the firm’s debt - the market value of preferred stock

= $16,641,100 - $2,700,000 - $1,000,000


= $12,941,000
The value of CoolTech’s common stock is therefore estimated to be $12,941,000. By dividing this total by the 1,100,00
shares of common stock that the firm has outstanding, we get a common stock value of $11.76 per share.
B. Judging on the basis of your finding in part A and the stock’s
offering price, should we buy the stock?

We should not to buy the stock


because IPO was being offered
($12.50) higher than common stock
value ($11.76)
C. On further analysis, you find that the growth rate in FCF beyond 2019 will
be 3% rather than 2%. What effect would this finding have on your
responses in parts a and b?

Therefore the calculation will change as follows: Value of the common stock

= $19,551,700 - $2,700,000 - $1,000,000


Value of FCF2020 to infinity =  =  = $15,851,700

The value of CoolTech’s common stock is


¿  $ 𝟐𝟐, 𝟔𝟔 𝟎 , 𝟎𝟎𝟎 therefore estimated to be $15,851,700. By
Total FCF2019 ¿  $ 1,100,000+ $ 22,660,00=$ 𝟐𝟑 , 𝟕𝟔𝟎 ,𝟎𝟎𝟎 dividing this total by the 1,100,00 shares of
common stock that the firm has
outstanding, we get a common stock value
Year (t) FCF PVIF 8%,t Present Value of FCFt
of $14.41 per share.
2016 $ 700,000 0.926 $ 648,200
2017 $ 800,000 0.857 $ 685,600
2018 $ 950,000 0.794 $ 754,300 This finding changes our decision to buy the
2019 $ 23,760,000 0.735 $ 17,463,600 shares because the price offered ($12.50) is
Value of entire company $ 19,551,700 lower than common stock value ($14.41)
THANK
YOU

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy