NovaTech (NT) is a start-up in nanotechnology based in Austin, Texas which has hired Goldman Sharks...
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NovaTech (NT) is a start-up in nanotechnology based in Austin, Texas which has hired Goldman Sharks (GS) as its leading underwriter to conduct its Initial Public Offering (IPO) at the Nasdaq Stock Exchange. The IPO is scheduled for January 2017. You are working for an investment bank that wants to know how much a share of NT is worth as of January 2016. The results of your analysis will be circulated among institutional investors in a bulletin with buy/sell recommendations for Nasdaq stocks, including NT's IPO. From the information provided by one of the venture capitalists with a stake in NT, you know that the proceeds from NT's IPO will be used entirely to fund NT's expenses in Research and Development (R&D) in the future. You also know that start-ups in nanotechnology pay no income tax in the state of Texas. The current financial statements of NT show that NT is currently unlevered. Given the current tax regime in Texas, the CEO of NT does not plan on issuing any debt in the foreseeable future. The pro-forma statements of NT contain the following information: The revenues of NT are expected to be USD 40 million in 2017. The operating cost of NT is 10% of its revenues. Other administrative expenses are equal 5% of NT's revenues. Both proportions are expected to remain the same in the foreseeable future. The capital expenditures of NT are 10% of its revenues. NT will reinvest the same fraction of its revenues as capital expenditures in the subsequent years. The depreciation of fixed assets from 2017 onwards amounts to 60% of NT's capital expenditures. NT will spend USD 16 million in Research and Development (R&D) in 2017. R&D expenses are expected to grow proportionately to sales. NT requires no working capital to operate. ree comparable firms have gone public in the Nasdaq Stock Exchange during the past five years. You ve the following data on these firms: Equity Beta Market Leverage Ratio Market Capitalization (in USD millions) AstraZen 2.50 10% 20 Phylos 2.10 3% 20 straZen and Phylos are based in California, whereas Protech is notechnology in California face a marginal income tax rate of 30%. straZen and Phylos have investment grade credit ratings. ProTech 2.00 0% 20 based in Texas. Start-ups in The long term debt contracts of 1 There is some disagreement among GSs industry analysts about the expected growth rate of cash flows of NT. While some analysts say that NT's revenues will grow at 2%, others say that NT's revenues will grow by 15% annually. Finally, the current US treasury 20-year bond rate is 4%. The current US treasury 1-year bond rate is 2%. Based on historical estimates, the market risk premium is estimated at 7%. You should answer the following questions for the sake of writing a weekly report which will be circulated among the institutional investors of your investment bank. 1. Calculate the free cash flows and the appropriate discount rate for NT. What is the expected value of NT's equity under the two possible growth forecasts for NT's revenues? Carefully explain your analysis. [15 points] 2. NT has currently 9 million shares outstanding and is planning to issue another 1 million at the IPO. GS, NT's underwriter, has set an offering price of USD 30 per share for NT's stock. Is this a positive NPV investment for the institutional clients of your investment bank? Carefully explain your answer. [15 points] Assume now that institutional investors expect the State of Texas to eliminate the no-tax incentive for start-ups in the incoming months, before NT goes public. NovaTech (NT) is a start-up in nanotechnology based in Austin, Texas which has hired Goldman Sharks (GS) as its leading underwriter to conduct its Initial Public Offering (IPO) at the Nasdaq Stock Exchange. The IPO is scheduled for January 2017. You are working for an investment bank that wants to know how much a share of NT is worth as of January 2016. The results of your analysis will be circulated among institutional investors in a bulletin with buy/sell recommendations for Nasdaq stocks, including NT's IPO. From the information provided by one of the venture capitalists with a stake in NT, you know that the proceeds from NT's IPO will be used entirely to fund NT's expenses in Research and Development (R&D) in the future. You also know that start-ups in nanotechnology pay no income tax in the state of Texas. The current financial statements of NT show that NT is currently unlevered. Given the current tax regime in Texas, the CEO of NT does not plan on issuing any debt in the foreseeable future. The pro-forma statements of NT contain the following information: The revenues of NT are expected to be USD 40 million in 2017. The operating cost of NT is 10% of its revenues. Other administrative expenses are equal 5% of NT's revenues. Both proportions are expected to remain the same in the foreseeable future. The capital expenditures of NT are 10% of its revenues. NT will reinvest the same fraction of its revenues as capital expenditures in the subsequent years. The depreciation of fixed assets from 2017 onwards amounts to 60% of NT's capital expenditures. NT will spend USD 16 million in Research and Development (R&D) in 2017. R&D expenses are expected to grow proportionately to sales. NT requires no working capital to operate. ree comparable firms have gone public in the Nasdaq Stock Exchange during the past five years. You ve the following data on these firms: Equity Beta Market Leverage Ratio Market Capitalization (in USD millions) AstraZen 2.50 10% 20 Phylos 2.10 3% 20 straZen and Phylos are based in California, whereas Protech is notechnology in California face a marginal income tax rate of 30%. straZen and Phylos have investment grade credit ratings. ProTech 2.00 0% 20 based in Texas. Start-ups in The long term debt contracts of 1 There is some disagreement among GSs industry analysts about the expected growth rate of cash flows of NT. While some analysts say that NT's revenues will grow at 2%, others say that NT's revenues will grow by 15% annually. Finally, the current US treasury 20-year bond rate is 4%. The current US treasury 1-year bond rate is 2%. Based on historical estimates, the market risk premium is estimated at 7%. You should answer the following questions for the sake of writing a weekly report which will be circulated among the institutional investors of your investment bank. 1. Calculate the free cash flows and the appropriate discount rate for NT. What is the expected value of NT's equity under the two possible growth forecasts for NT's revenues? Carefully explain your analysis. [15 points] 2. NT has currently 9 million shares outstanding and is planning to issue another 1 million at the IPO. GS, NT's underwriter, has set an offering price of USD 30 per share for NT's stock. Is this a positive NPV investment for the institutional clients of your investment bank? Carefully explain your answer. [15 points] Assume now that institutional investors expect the State of Texas to eliminate the no-tax incentive for start-ups in the incoming months, before NT goes public.
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To answer these questions we need to calculate the free cash flows FCF and the appropriate discount rate for NT Then we can determine the expected value of NTs equity under the two possible growth for... View the full answer
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