4. (End-of-chapter numerical problem 18.4 part d, which requires some self-work) Bynum and Crumpton, Inc. (B&C), a small jewelry manufacturer, has been successful and has enjoyed a positive growth trend. olic with an issue of common stock, and it faces the problem of setting he stock. The company and its investment bank believe that the proper procedure is to conduct a valuation and select several similar firms with publicly traded common stock and to make relevant comparison. Several jewelry manufacturers are reasonably similar to B&C with respect to product mix, asset composition, and debt/equity proportions. Of these companies, Abercrombe Jewelers and Grunter Fashion are most similar. When analyzing the following data, assume that the most recent year has been reasonably "normal" in the sense that it was neither especially good nor especially bad in terms of sales, earnings, and free cash flows. Abercrombe is listed on the AMEX and Grunter on the NYSE, while B&C will be traded in the NASDAQ market. Company Data Abercrombe Gunter B&C Shares outstanding 5 million 10 million 500,000 Market Price of Equity per share $35.00 $47.00 NA Earnings per share $2.20 $3.13 $2.60 Free cash flow per share $1.63 1 $2.54 $2.00 Book value of Equity per share $16.00 T $20.00 $18.00 Total assets (book value) $115 million $250 million $11 million Total debt (book value) $35 million $50 million $2 million a. B&C is a closely held company with 500,000 shares outstanding. Free cash flows have been low and in some years negative due to B&C's recent high sales growth rates, but as its expansion phase comes to an end B&C's free cash flows should increase. B&C anticipates the following free cash flows over the next 5 years (assuming it can raise the necessary capital): Year FCF $1,000,000 $1,050,000 $1,208,000 $1,329,000 $1,462,000 a. B&C is a closely held company with 500,000 shares outstanding. Free cash flows have been low and in some years negative due to B&C's recent high sales growth rates, but as its expansion phase comes to an end B&C's free cash flows should increase. B&C anticipates the following free cash flows over the next 5 years (assuming it can raise the necessary capital): Year $1,000,000 $1,050,000 $1,208,000 $1,329,000 $1,462,000 After Year 5, free cash flow growth will be stable at 7% per year. Currently, B&C has no excess cash, and its WACC is 12%. Using the free cash flow valuation model, estimate B&C's intrinsic value of equity and intrinsic per share price prior to the IPO (assuming it raises the necessary IPO). b. Calculate debt to total assets, P/E, market to book, P/FCF, and ROE for Abercrombe, Gunter, and B&C. For calculations that require a price for B&C, use the per share price you obtained with the corporate valuation model in Part a. c. Using Abercrombe's and Gunter's P/E, Market/Book, and Price/FCF ratios, calculate the range of (pre-IPO) prices for B&C's stock that would be consistent with these ratios. For example, if you multiply B&C's earnings per share by Abercrombe's P/E ratio you get a price for B&C consistent with Abercrombe's P/E ratio. What range of prices do you get? How does this compare with the prices you get using the FCF valuation model? d. Suppose B&C Corp wanted to raise $1.86 million through the IPO. What is the IPO price if underwriting spread was 7% and there was no underpricing? Use your answer in part a) for the pre-IPO value