Roban Corporation is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Roban decide to make their own estimate of the firm's common stock value.
The firm's chief financial officer gathered the following data for performing the valuation using the free cash flow valuation model. The firm's weighted average cost of capital is 12 percent. It has $1,400,000 of debt at market value and $500,000 of preferred stock at its assumed market value.
The estimated free cash flows over the next five years, 2010 through 2014, are given below. Beyond 2014 to infinity, the firm expects its free cash flow to grow by 4 percent annually.
|
Year
|
Free Cash Flow
|
|
2010
|
$ 250,000
|
|
2011
|
290,000
|
|
2012
|
320,000
|
|
2013
|
360,000
|
|
2014
|
400,000
|
a. Estimate the value of Roban Corporation's entire company by using the free cash flow approach.
b. Use your finding in part (a), along with the data provided above, to find Roban Corporation's common stock value.
c. If the firm plans to issue 220,000 shares of common stock, what is its estimated value per share?