An IPO is being offered for P10.00 per share. Much that you want to accept the offer, you want to know if it is fairly priced. Considering that you have a good idea of Free Cash Flow in determining the stock valuation. Based on the latest financial statements of the company, you were able to compute the free cash flow amounted to P300,000 for the current year. You project that for the next two years, this free cash flow will have a growth of 30%, and 20% for the last three years. Then it will maintain its normal growth rate of 10% to infinity. The weighted cost of capital is 15%. The market value of all long term debts totaled P2.0 million and a preferred stock valued at P1.25 million. The company wishes to issue 750,000 shares of common stock. Period PV factor Total Year 1 300,000 x 1.30 390,000 0.8696 339,144 Year 2 390,000 x 1.30 507,000 0.7561 383,342.7 Year 3 507,000 x 1.20 608,400 0.6575 400,023 Year 4 608,400 x 1.20 730,080 0.5718 417,459.74 Year 5 730,080 x 1.20 867,096 0.4972 435,594.93 876,096 x 1.10/15% - 10% 19,274,112 0.4972 9,583,088.49 Value of the Firm 11,558,652.86 Value of the Firm 11,558,652.86 Less: Total Debt (2,000,000) Preferred Stock (1,250,000) Value of Common Stock 8,308,652.86 Divided by: No. Shares Common 750,000 Price per Share P11.08 Should you buy the offered IPO? Why? Explain your answer thoroughly.
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
An IPO is being offered for P10.00 per share. Much that you want to accept the offer, you want to know if it is fairly priced. Considering that you have a good idea of
|
Period |
PV factor |
Total |
||
|
Year 1 |
300,000 x 1.30 |
390,000 |
0.8696 |
339,144 |
|
Year 2 |
390,000 x 1.30 |
507,000 |
0.7561 |
383,342.7 |
|
Year 3 |
507,000 x 1.20 |
608,400 |
0.6575 |
400,023 |
|
Year 4 |
608,400 x 1.20 |
730,080 |
0.5718 |
417,459.74 |
|
Year 5 |
730,080 x 1.20 |
867,096 |
0.4972 |
435,594.93 |
|
876,096 x 1.10/15% - 10% |
19,274,112 |
0.4972 |
9,583,088.49 |
|
|
Value of the Firm |
11,558,652.86 |
|
Value of the Firm |
11,558,652.86 |
|
Less: Total Debt |
(2,000,000) |
|
Preferred Stock |
(1,250,000) |
|
Value of Common Stock |
8,308,652.86 |
|
Divided by: No. Shares Common |
750,000 |
|
Price per Share |
P11.08 |
Should you buy the offered IPO? Why? Explain your answer thoroughly.
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