Problem 18-04 PLEASE ONLY ANSWER PART C. THANK YOU. Answers to parts A and B provided. New Stock Issue

Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has been successful and has enjoyed a positive growth trend. Now B&C is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price for the stock. The company and its investment banks believe that the proper procedure is to conduct a valuation and select several similar firms with publicly traded common stock and to make relevant comparisons. 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 Gunter Fashions 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 Gunter 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
Price per share	$37.00		$55.00		NA
Earnings per share	$2.20		$3.13		$2.60
Free cash flow per share	$1.63		$2.54		$2.00
Book value per share	$16.00		$24.00		$19.00
Total assets	$115 million		$290 million		$11.5 million
Total debt	$35 million		$50 million		$2 million

Answer the Following: HINT : Keep all decimal places from previous answers, to calculate future answers.

A. B&C is a closely held corporation with only 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:

Year	1	2	3	4	5
FCF	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 non-operating assets, and its WACC is 12%. Using the free cash flow valuation model (see Chapters 8 and 9), estimate B&C's intrinsic value of equity and intrinsic per share price. Round your answers for the value of equity to the nearest dollar and for the value of equity per share to the nearest cent.

Value of equity	$
Per share value of equity	$

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.

	Abercrombe		Gunter		B&C
D/A	%		%		%
P/E
Market/Book
ROE	%		%		%
P/FCF

C. Using Abercrombe's and Gunter's P/E, Market/Book, and Price/FCF ratios, calculate the range of 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. What range of prices do you get? Round your answers to the nearest cent.

The range of prices:

from $ to $

A. we've to use a 2-stage model to valuate the company in the question.

Given a set of free cash flows up until 5th year. From 6th year onwards the free cash flow will grow at a rate of 7% per annum.

Therefore, the value of free cash flow at the 5th year for the set of cash flows from 6th year onwards

where r, is the WACC and g is the growth rate by which FCFF grows.

Present value of future cash flows

This will be added to the 5th year cash flows 1,462,000 to give 32,748,800.

Note r = 12%

Year	1	2	3	4	5
Free cash flows	1,000,000	1,050,000	1,208,000	1,329,000	32,748,800
Present value =	892,857.14	837,053.57	859,830.54	844,603.53	18,582,548.61

Adding all the values in the 3rd row, we'll get the present value of free cash flow which is

22,016,893.39

If we remove the total debt that B&C from this present value of free cash flow, we'll get the value of equity-

Value of equity = 22,016,893.39 - 2,000,000 = 20,016,893.39 Price per share

B.

ABERCROMBE

D/A = Total Debt/(Total Asset) = 35/115 = 0.3043 = 30.43%

P/E = Price per share/ (Earnings per share) = 37/2.2 = 16.82

Market/Book = Market Price per share/ (Book value per share) = 37/16 = 2.31

ROE = Earnings per share/(Book value per share) = = 2.2/16 = 0.14

P/FCF = Price per share/ (Free cash flow per share) = 37/1.63 = 22.7

For Gunter

D/A = Total Debt/(Total Asset) = 50/290 = 0.17 = 17%

P/E = Price per share/ (Earnings per share) = 55/3.13 = 17.57

Market/Book = Market Price per share/ (Book value per share) = 55/24 = 2.29

ROE = Earnings per share/(Book value per share) = 3.13/24 = 0.13

P/FCF = Price per share/ (Free cash flow per share) = 55/2.54 = 21.65

For B&C

D/A = Total Debt/(Total Asset) = 2/11.5 = 0.1739 = 17.39%

P/E = Price per share/ (Earnings per share) = 40.03/2.6 = 15.4

Market/Book = Market Price per share/ (Book value per share) = 40.03/19 = 2.11

ROE = Earnings per share/(Book value per share) = = 2.6/19 = 0.14

P/FCF = Price per share/ (Free cash flow per share) = 40.03/2 = 20

	Abercrombe	Gunter	B&C
D/A	30.43%	17%	17.39%
P/E	16.82	17.57	15.4
Market/Book	2.31	2.29	2.11
ROE	0.14	0.13	0.14
P/FCF	22.7	21.65	20