Assume that it is the end of year 2015 and you have an opportunity to buy the stock of? CoolTech, Inc., an IPO being offered for ?$4.92 per share. Although you are very much interested in owning the? company, you are concerned about whether it is fairly priced. To determine the value of the? shares, you have decided to apply the free cash flow valuation model to the? firm's financial data that? you've developed from a variety of data sources. The key values you have compiled are summarized in the following? table,
FREE CASH FLOW
Year(t) FCF Other Data
2016 . $660,000 . Growth Rate of FCF, beyond 2019 to infinity = 2%
2017 . $740,000 . Weighted average cost of capital = 12%
2018 . $850,000 . Market value of all debt = $1,780,000
2019 . $1,000,000 . Market value of preferred Stock = $710,000
Number of shares of common stock to be issued = 1,100,000
a. Use the free cash flow valuation model to estimate? CoolTech's common stock value per share.
b. Judging on the basis of your finding in part a and the? stock's offering? price, should you buy the? stock?
c. On further? analysis, you find that the growth rate in FCF beyond 2019 will be 3?% rather than 2?%. What effect would this finding have on your responses in parts a and b??