Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $5.96 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 developed from a variety of data sources. The key values you have compiled are summarized in the following table.
Year FCF Other data
2016 670,000 Growth rate of FCF, beyond 2019to infinity = 3%
2017 780,000 Weighted average costof capital = 11%
2018 900,000 Market value of all debt = 2,260,000
2019 1,030,000 Market value of preferred stock = $900,000
Number of shares of common stock to be issued= 1,100,000
a. Use the free cash flow valuation model to estimate CoolTech's common stock value per share. AND the value of the entire company.
b. Judging on the basis of your finding in part a and the stock's offering price, should you buy the stock?
c. On further analysis, you find the growth rate in FCF beyond 2019 will be 4% rather than 3%. What effect would this finding have on your responses in parts a and b?