Roban Corporation is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Roban have decided to make their own estimate of the firm's common stock value. The firm's CFO gathered the following data for performing the valuation using the free cash flow valuation model.
The firm's weighted average cost of capital is 12 %. It has $1,400,000 of debt at market value and $500,000 of preferred stock at its assumed market value. The estimated free cash flows over the next five years, 2013 through 2017, follow. Beyond 2017, to infinity, the firm expects its free cash flow to grow by 4 % annually.
Year Free Cash Flow
2013 $250,000
2014 $290,000
2015 $320,000
2016 $360,000
2017 $400,000
a) Estimate the value of Roban Corporation's entire company by using the free cash flow approach.
b) Use your finding in part (a), along with the data provided above, to find Roban Corporation's common stock value.
c) If the firm plans to issue 220,000 shares of common stock, what is its estimated value per share?