Question

[10] Floating 250 million shares next month, new Millenium Company is undergoing its IPO in an...

[10] Floating 250 million shares next month, new Millenium Company is undergoing its IPO in an industry where the average P/E ratio for similar firms is 18. It expects to pay steady annual dividends of $1.38 per share in each of the first four years, and projects earnings of $750 million by year 4. Risk-model pricing necessitates a 14% discount rate. Considering the projected cash flows from the firm and the P/E for the industry, what would be your estimate of the price per share that the investment bank should set for the stock's IPO next month?

Homework Answers

Answer #1
Earnings 750 million
Shares 250 million
EPS 3
PE ratio 18
Price at year 4 54
Year Cash Flow PV factor @ 14% PV
1 1.38        0.877          1.21
2 1.38        0.769          1.06
3 1.38        0.675          0.93
4 1.38        0.592          0.82
4        54.00        0.592        31.98
NPV        36.00
So IPO price should be 36
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