Question

Excel Online Structured Activity: New Stock Issue A-Z 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. Abercrombe Gunter B&C 5 million 11 million 500,000 NA $33.00 $2.20 Company data Shares outstanding Price per share Earnings per share Free cash flow per share Book value per share Total assets Total debt $46.00 $3.13 $2.54 $2.60 $1.63 $17.00 $120 million $22.00 $292 million $50 million $2.00 $18.00 $10 million $2 million $35 million The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. X Open spreadsheet Next Back

Answer 1

Year	1	2	3	4	5
FCF	$1,000,000	$1,050,000	$1,208,000	$1,329,000	$1,462,000

C5 = 1,462,000

After Year 5, free cash flow growth will be stable at g = 7% per year. Currently, B&C has no nonoperating assets, and its WACC is r = 12%. Using the free cash flow valuation model, estimate the

(1) horizon value = C5 x (1 + g) / (r - g) = 1,462,000 x (1 + 7%) / (12% - 7%) = $  31,286,800

(2) intrinsic value of operations = C1 / (1 + r) + C2 / (1 + r)² + C3 / (1 + r)³ + + C4 / (1 + r)⁴ + (C5 + Horizon value) / (1 + r)⁵ =  $1,000,000 / 1.12 + $1,050,000 / 1.12² + $1,208,000 / 1.12³ + $1,329,000 / 1.12⁴ + ($1,462,000 + 31,286,800
) / 1.12⁵ =  $  22,016,893

(3) intrinsic value of equity =  22,016,893 - value of debt =  22,016,893 - 2,000,000 = $  20,016,893

and (4) intrinsic per share price =  20,016,893 / number of shares =  20,016,893 / 500,000 = $  40.03

b)

	Abercrombe	Gunter	B & C
1)debt / assets (D / A)	(35 / 120)*100 = 29.16%	(50 / 292)*100 = 17.12%	(2 / 10)*100 = 20%
2)P / E(market price / EPS)	33 / 2.2 = 15	46 / 3.13 = 14.69	40.03/ 2.6 = 15.39
3)MARKET / BOOK	33 / 17 = 1.94	46 / 22 = 2.09	40.03 / 18 = 2.22
4)ROE(EPS / BOOK VALUE)	(2.2 / 17)*100 = 12.94%	(3.13 / 22)*100 = 14.22%	(2.6 / 18)*100 = 14.44%
5)PRICE(Market) / FCF	33 / 1.63 = 20.24	46 / 2.54 = 18.11	40.03/ 2= 20.015

C)Range of prices:

Price = P/E x EPS	Abercrombe	Gunter
P/E ratio	15	14.69
EPS Of B&C	2.6	2.6
Price of B&C	39	38.194

Using M/B values:	Abercrombe	Gunter
M/B ratio	1.94	2.09
Book value Of B&C	18	18
Price of B&C	34.92	37.62
Price = M/B ratio x book value of B&C

Using Price / FCF Ratios	Abercrombe	Gunter
Price/FCF ratio	20.24	18.11
FCF Of B&C	2	2
Price of B&C	40.48	36.22

Using the above data

Range = lowest price to highest price

Range = 34.92 to 40.48

Price of B&C = $40.03

So the price is Within the range