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Category > Accounting Posted 13 May 2017 My Price 5.00

Amarindo, Inc. (AMR), is a newly public firm with 10

Amarindo, Inc. (AMR), is a newly public firm with 10 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be $15 million, and you expect the firm’s free cash flows to grow by 4% 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:

 

Equity Beta

Debt Beta

Debt-Equity Ratio

UAL

1.5

0.30

1

AMR has a much lower debt-equity ratio of 0.30, which is expected to remain stable, and its debt is risk free. AMR’s corporate tax rate is 40%, the risk-free rate is 5%, and the expected return on the market portfolio is 11%.

a. Estimate AMR’s equity cost of capital.

b. Estimate AMR’s share price.

Answers

Alpha Geek
(8)
Status NEW Posted 13 May 2017 07:05 AM My Price 5.00

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file 1494662014-Answer.docx preview (244 words )
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