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Problem 4) (20 points) UNR Corp. is planning to go public, and it faces the problem of setting an appropriate price for the stock. As a financial analyst you are going to estimate an IPO price for the firm. You are given the following information about the firm. The firm recently reported $40,000 of sales, $10,000 of operating costs other than depreciation, $3,000 of depreciation and amortization charges. The firm has $18,000 of outstanding bonds that carry a 10% interest rate, and its federal-plus-state income tax rate was 25%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $12,500 to buy new fixed assets and to invest $5,500 in net operating working capital. a) How much free cash flow did the firm generate? b) An analyst estimates that the FCF should grow rapidly- at a rate of 8% per year- during years 1, 2, and 3; but after year 3, growth should be a constant 5% per year. If the firm's WACC is 15%, what is the intrinsic value of the firm today? c) Assume that CEO decides your calculations in part b are correct and sets the firm's Pre-IPO Value to your estimated firm value in part (b) (e.g., Pre-IPO Value = your result in Part b). UNR's founders and early investors owned 20,000 shares before the IPO. UNR will sell 10,000 new shares in the IPO. What is the IPO offer price for UNR? Investment bank spread was 8%. b) An analyst estimates that the FCF should grow rapidly at a rate of 8% per year- during years 1, 2, and 3; but after year 3. growth should be a constant 5% per year. If the firm's WACC is 15%, what is the intrinsic value of the firm today? Assume that CEO decides your calculations in part b are correct and sets the firm's Pre-IPO Value to your estimated firm value in part (b) leg. Pre-IPO Value = your result in Part b) UNR's founders and early investors owned 20,000 shares before the IPO. UNR Will sell 10,000 new shares in the IPO. What is the IPO offer price for UNR? Investment bank spread was 8% d) Assume that the investment bank sold all shares at the IPO offer price you calculated in part c, what is the proceed under-writer gives to the company? You can use your findings from partc to answer part d. e) CEO is worried that he may lose control of the form after the IPO. What would you suggest him to do? (No need for calculations, 1-3 sentences)

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