Using the free cash flow valuation model to price an IPO Personal Finance Problem Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offeredfor $4.61 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 havedecided to apply the free cash flow valuation model to the firm's financial data that you've accumulated from a variety of data sources. The key values you have compiled aresummarized in the following table,a. Use the free cash flow valuation model to estimate CoolTech's common stock value per share.b. Judging by 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 year 4 will be 3% rather than 2%. What effect would this finding have on your responses in parts a and b?a. The value of CoolTech's entire company is $Data table(Click on the icon here in order to copy the contents of the data table below into a spreadsheet.)Free cash flowYear (t)1234FCF(Round to the nearest dollar.)$660,000$790,000$900,000$1,010,000Other dataGrowth rate of FCF, beyond year 4 = 2%Weighted average cost of capital = 12%Market value of all debt = $1,810,000Market value of preferred stock = $720,000Number of shares of common stock outstanding = 1,100,000PrintDoneX

Free cash flow:Free cash flow represents a crucial financial metric reflecting the surplus funds a…

Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Free cash flow Year (t) 1 234 FCF $660,000 $790,000 $900,000 $1,010,000 Other data Growth rate of FCF, beyond year 4 = 2% Weighted average cost of capital = 12% Market value of all debt = $1,810,000 Market value of preferred stock = $720,000 Number of shares of common stock outstanding = 1,100,000 Print Done X

Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Free cash flow Year (t) 1 234 FCF $660,000 $790,000 $900,000 $1,010,000 Other data Growth rate of FCF, beyond year 4 = 2% Weighted average cost of capital = 12% Market value of all debt = $1,810,000 Market value of preferred stock = $720,000 Number of shares of common stock outstanding = 1,100,000 Print Done X

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter9: Stocks And Their Valuation

Section: Chapter Questions

Problem 9TCL

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