Company xyz expects to generate FCFs of $15 M next year. This will grow for 5 years at 12%, after which the company will continue to grow at the risk-free rate of 2%. The equity risk premium is 6%; 30% of the company’s revenues occur in the U.S., but 70% of revenues come from China (which has a risk premium of 0.90%). EBITDA in the most recent year was $20 M and the Debt is $21 M, which implies a D/E ratio of 0.10 based on the pre-IPO values of equity. The company has 10 million shares outstanding and no cash on its balance sheet. The median beta is 1.2 and the median D/E ratio is 0.20. The median EV/EBITDA multiple is 12.5. The cost of debt is 5% (assume that this is also the cost of debt for SmartTag). Assume that the tax rate for all companies is 40%. Company xyz plans to use the proceeds of the IPO to pay a one-time dividend to its initial shareholders, so the proceeds will not affect the IPO valuation.

1. Calculate SmartTag’s WACC

2. Using a DCF valuation, determine the enterprise value for SmartTag

3. Based on your DCF valuation, what is the appropriate offer price (share price) for SmartTag?

4. Using a relative valuation, what is the appropriate share price for SmartTag?

5. How would you explain the difference between (3) and (4)?

6. If you were the investment bank underwriting SmartTag’s IPO, what offer price would you set? Why?