Briarwood Medical Equipment (BME) needs to raise capital for a $250 thousand expansion to meet customer demand. William Lewis founded BME in 1980. His sons now manage the business and hope to keep the business in the family for years to come. Firm management has reviewed possible methods of raising the funds from issuing new debt with a small business loan to possibly issuing common stock. The family owns preferred stock in the company and BME launched an IPO of common stock in 2009.
The firm is reluctant to incur the risks of new debt. The decision to raise capital by selling equity in the company offers lower risks but diminishes the family control over the company. The following information should be considered in making the decision.
The current valuation of BME is $500,000. Revenue for 2011 was $250,000. Cash flow projections for 2012 are $260,000 and $270,000 in 2013. Revenue projections for 2014 are $280,000 and $290,000 in 2015. Revenue projections for 2016 are $300,000. The initial IPO sets the price per share at $1. Dividends for 2010 were .15 per share
The issuance of new stock would set the price at $1.15 per share. BME anticipates a return of 10% in the coming year due to expanding market share while the risk-free premium is 5% for the coming year. The stock beta for BME is 1.25. Locate a CAPM calculator online and discuss the following assignment topics.
ASSIGNMENT
Discuss the options available to BME in raising capital.
Calculate the CAPM, DCF, and fair value per share of stock for BME
Present the findings in making your recommendations for BME and potential investors.