IPO Valuation Anita's Chicken, a company selling roasted chickens and accompaniments in outlets through the country, went public in 1993. In the year prior to going public, it had revenues of $40 million, on which it reported earnings before interest and taxes of $12 million. The firm had no debt outstanding, and expected revenues to grow 35% a year from 1993 to 1997, 15% a year from 1998 to 2000, and 5% a year after that, while pretax operating margins (EBIT/Revenues) were expected to remain stable. Capital expenditures, which exceeded depreciation by $5 million in the year prior to going public ñ were expected to grow 20% a year from 1993 to 1997, as is depreciation. After 1998, capital expenditures are expected to offset depreciation. Working capital requirements are negligible.

The average beta of publicly traded fast-food chains with which Anita's Chicken will be competing is 1.15, and their average debt-equity ratio is 25%. Anita's Chicken plans to maintain its policy of no debt until 1997, and to move to the industry average debt ratio after that (the pre-tax cost of debt is expected to be 8%). The treasury bond rate is 7%. All firms face a tax rate of 40%. Assume a current market risk premium of 5.50%.

A. Estimate the cost of equity for Anita's Chicken.

B. Estimate the value of equity for Anita's Chicken

Answer rating: 100% (QA)

A Cost of Equity Riskfree rate 7 Market Risk Premium 550 Beta 115 Cost of Equity Riskfree Rate Beta ... View the full answer