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