New Stock Issue Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has
ID: 2778096 • Letter: N
Question
New Stock Issue Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has been successful and has enjoyed a positive growth trend. Now B&C is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price for the stock. The company and its investment banks believe that the proper procedure is to conduct a valuation and select several similar firms with publicly traded common stock and to make relevant comparisons. Several jewelry manufacturers are reasonably similar to B&C with respect to product mix, asset composition, and debt/equity proportions. Of these companies, Abercrombe Jewelers and Gunter Fashions are most similar. When analyzing the following data, assume that the most recent year has been reasonably "normal" in the sense that it was neither especially good nor especially bad in terms of sales, earnings, and free cash flows. Abercrombe is listed on the AMEX and Gunter on the NYSE, while B&C will be traded in the Nasdaq market.
Company data:
B&C is a closely held corporation with only 500,000 shares outstanding. Free cash flows have been low and in some years negative due to B&C's recent high sales growth rates, but as its expansion phase comes to an end B&C's free cash flows should increase. B&C anticipates the following free cash flows over the next 5 years:
1 2 3 4 5
1,000,000 1,050,000 1,208,000 1,329,000 1,462,000
A) After Year 5, free cash flow growth will be stable at 7% per year. Currently, B&C has no non-operating assets, and its WACC is 12%. Using the free cash flow valuation model, estimate B&C's intrinsic value of equity and intrinsic per share price. Round your answers for the value of equity to the nearest dollar and for the value of equity per share to the nearest cent.
Value of equity $
Per share value of equity $
B) Calculate debt to total assets, P/E, market to book, P/FCF, and ROE for Abercrombe, Gunter, and B&C. For calculations that require a price for B&C, use the per share price you obtained with the corporate valuation model in part a. Round your answers to two decimal places. Round ROE to one decimal place.
C) Using Abercrombe's and Gunter's P/E, Market/Book, and Price/FCF ratios, calculate the range of prices for B&C's stock that would be consistent with these ratios. For example, if you multiply B&C's earnings per share by Abercrombe's P/E ratio you get a price. What range of prices do you get? Round your answers to the nearest cent.
The range of prices: from $ to $
Abercrombe Gunter B&C Shares Outstanding 4 million 9 million 500,000 Price per share $34.00 $45.00 NA Earnings per share $2.20 $3.13 $2.60 Free cash flow per share $1.63 $2.54 $2.00 Book value per share $17.00 $21.00 $19.00 Total assets $103 million $239 million $11.5 million Total Debt $35 million $50 million $2 millionExplanation / Answer
A ) Calculation of free cash flow
PV of cash flows for 5 years = $ 4263923
After 5 years, it will grow by 7% each year
Hence, the cash flow for year 6 = 1462000 + (1462000*.07) = 1564340.
The above amount is divided by WACC reduced by growth rate to arrive at the perpetual value.
=1564340 / (.12-.07) = 31286800
This amount is to be discounted using the PV factor for 5 th year @ 12% = 31286800 * 0.5674 = 17752971
The total free cash flow = 4263923 + 17752971 = $ 22016893.89
Since there are no non operating assets, the free cash flow is the value of equity. = $ 22016893.89
The price per share will be 6360288 / 500000 = $ 44.03
B) Ratios Calculated
Part C is not answered
Year FCF PVF @ 12% PV of cash Flows 1 1000000 0.892857143 892857.1429 2 1050000 0.797193878 837053.5714 3 1208000 0.711780248 859830.5394 4 1329000 0.635518078 844603.5262 5 1462000 0.567426856 829578.0631Related Questions
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