Question

[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?

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 | ||||

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...

Everyday investment company Sharesies was launched in February
2017, after conducting research on New Zealanders’ attitudes
towards investing. Prior to launching the company, the co-founders
interviewed over 200 people asking them “If I gave you $50 right
now, and you had to do something with it in the next 5 minutes what
would you do?” Only 5 out of 200 people chose an option to save or
invest the $50. More popular options were bills, online shopping,
coffees, vouchers, food,...

Everyday investment company Sharesies was launched in February
2017, after conducting research on New Zealanders’ attitudes
towards investing. Prior to launching the company, the co-founders
interviewed over 200 people asking them “If I gave you $50 right
now, and you had to do something with it in the next 5 minutes what
would you do?” Only 5 out of 200 people chose an option to save or
invest the $50. More popular options were bills, online shopping,
coffees, vouchers, food,...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 8 minutes ago

asked 11 minutes ago

asked 12 minutes ago

asked 16 minutes ago

asked 22 minutes ago

asked 23 minutes ago

asked 24 minutes ago

asked 29 minutes ago

asked 35 minutes ago

asked 36 minutes ago

asked 38 minutes ago