Suppose the concatenator division, which we valued based on Table, is spun off as an independent company, Concatco, with 1 million shares of common stock outstanding. What would each share sell for? Before answering, notice the negative free cash flows for years 1 to 6. The PV of these cash flows is -$3.6 million. Assume that this shortfall will have to be financed by additional shares issued in the near future. Also assume for simplicity that the $3.6 million earns interest at 10% and is sufficient to cover the negative free cash flows in Table. Concatco will pay no dividends in years 1 to 6, but will pay out all free cash flow starting in year 7.
Now calculate the value of each of the 1 million existing Concatco shares. Briefly explain your answer. Suppose the existing stockholders, who own 1 million shares, buy newly issued shares to cover the $3.6 million financing requirement. In other words, the $3.6 million comes directly out of existing stockholders€™ wallets. What€™s the value per share? Now suppose instead that the $3.6 million comes from new investors, who buy shares at a fair price. Does your answerchange?

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10 Asset value 10.00 12.00 4.40 728 20.74 23.43 26.47 28.05 29.73 31.51 1.20 2.00 2.40 .83.46 2.69 3.04 1.59 .68 1.78 1.89 -80-96-1.15 139-2023 1.59 1.68 1.791.89 1.44 1.73 2.072.49 2.8 3.18 3.36 37 3.78 Net investment Free cash flow Earnings growth from previous period (%) 20 20 20 20 20 13 13