Amarindo, Inc. (AMR), is a newly public firm with 9.5 million shares outstanding. You are doing a
Question:
Amarindo, Inc. (AMR), is a newly public firm with 9.5 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be $14.97 million, and you expect the firm’s free cash flows to grow by 3.7% 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:
AMR has a much lower debt-equity ratio of 0.36, which is expected to remain stable, and its debt is risk free. AMR’s corporate tax rate is 35%, the risk-free rate is 5.1%, and the expected return on the market portfolio is 11.2%.
a. Estimate AMR’s equity cost of capital.
b. Estimate AMR’s share price.
Step by Step Answer:
a To estimate AMRs equity cost of capital first we must determine its cost of debt and cost of equit...View the full answer
