Problem 18-04
New Stock Issue

Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer,has been successful and has enjoyed a positive growth trend. NowB&C is planning to go public with an issue of common stock, andit faces the problem of setting an appropriate price for the stock.The company and its investment banks believe that the properprocedure is to conduct a valuation and select several similarfirms with publicly traded common stock and to make relevantcomparisons.
Several jewelry manufacturers are reasonably similar to B&Cwith respect to product mix, asset composition, and debt/equityproportions. Of these companies, Abercrombe Jewelers and GunterFashions are most similar. When analyzing the following data,assume that the most recent year has been reasonably "normal" inthe sense that it was neither especially good nor especially bad interms of sales, earnings, and free cash flows. Abercrombe is listedon the AMEX and Gunter on the NYSE, while B&C will be traded inthe Nasdaq market.

Company data	Abercrombe		Gunter		B&C
Shares outstanding	6 million		9 million		500,000
Price per share	$31.00		$49.00		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	$14.00		$22.00		$19.00
Total assets	$119 million		$248 million		$11.5 million
Total debt	$35 million		$50 million		$2 million

1. B&C is a closely held corporation with only 500,000 sharesoutstanding. Free cash flows have been low and in some yearsnegative due to B&C's recent high sales growth rates, but asits expansion phase comes to an end B&C's free cash flowsshould increase. B&C anticipates the following free cash flowsover 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 is12%. Using the free cash flow valuation model (see Chapters 8 and9), estimate B&C's intrinsic value of equity and intrinsic pershare price. Round your answers for the value of equity to thenearest dollar and for the value of equity per share to the nearestcent.

   Value of equity	$
   Per share value of equity	$

2. Calculate debt to total assets, P/E, market to book, P/FCF, andROE for Abercrombe, Gunter, and B&C. For calculations thatrequire a price for B&C, use the per share price you obtainedwith the corporate valuation model in Part a.

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

   
   
3. Using Abercrombe's and Gunter's P/E, Market/Book, and Price/FCFratios, calculate the range of prices for B&C's stock thatwould be consistent with these ratios. For example, if you multiplyB&C's earnings per share by Abercrombe's P/E ratio you get aprice. What range of prices do you get? Round your answers to thenearest cent.
   
   The range of prices:
   from $   to $