Principles of Managerial Finance 14th ed. Lawrence Gitman and Chad Zutter

P7-17 (p.306)

Using the free cash flow valuation model to price an IPO

Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $12.50 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. (See table p. 306)

a) Use the free cash flow valuation model to estimate CoolTech’s common stock value per share.

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 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?