Amarindo, Inc. (AMR), is a newly public firm with 11.5 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be $15.19 million, and you expect the firm's free cash flows to grow by 3.8% per year in subsequent years. Because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of AMR's equity beta. However, you do have beta data for UAL, another firm in the same industry.
Chart/Info Given: UAL ..... Equity Beta: 1.20 Debt Beta: 0.24 Debt-Equity Ratio: 0.8
AMR has a much lower debt-equity ratio of 0.24, which is expected to remain stable, and its debt is risk free. AMR's corporate tax rate is 25%, the risk-free rate is 5.3%, and the expected return on the market portfolio is 10.9%.
a. Estimate AMR's equity cost of capital.
b. Estimate AMR's share price.