You have been asked by the owner of Tectonics Software, a small firm that produces and sells…

You have been asked by the owner of Tectonics Software, a small firm that produces and sells computer software, to come up with an estimate of value for the firm for an initial public offering. The firm had revenues of $20 million in the most recent year, on which it made earnings before interest and taxes of $2 million. The firm had debt outstanding of $10 million, on which pretax interest expenses amounted to $1 million. The book value of equity is $10 million. The average unlevered beta of publicly traded software firms is 1.20, and the average market value of equity of these firms is, on

»You have been asked by the owner of Tectonics Software, a small firm that produces and sells computer software, to come up with an estimate of value for the firm for an initial public offering. The firm had revenues of $20 million in the most recent year, on which it made earnings before interest and taxes of $2 million. The firm had debt outstanding of $10 million, on which pretax interest expenses amounted to $1 million. The book value of equity is $10 million. The average unlevered beta of publicly traded software firms is 1.20, and the average market value of equity of these firms is, on average, three times the book value of equity. All firms face a 40% tax rate. Capital expenditures amounted to $1 million in the most recent year and were twice the depreciation charge in that year. Both items are expected to grow at the same rate as revenues for the next five years. The return on capital after year 5 is expected to be 15%. The revenues of this firm are expected to grow 20% a year for the next five years and 5% after that, and the operating margins will remain at existing levels. The Treasury bond rate is 6%. a. Estimate the cost of capital for the firm. b. Estimate the value of the equity in the firm. c. If the firm plans to issue 1 million shares, estimate the value per share.

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