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Amarindo Inc AMR is a newly public firm with 105 million shares outstanding You are doing a valuation analysis of AMR You estimate its free cash flow in the coming year to be 1537 million

Amarindo, Inc. (AMR), is a newly public firm with 10.5 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be $15.37 million, and you expect the firm’s free cash flows to grow by 4.4% per year in subsequent years. Because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of AMR’s equity beta. However, you do have beta data for UAL, another firm in the same industry:

                                      Equity Beta                                      Debt Beta                                    Debt-Equity Ratio
UAL                                   1.80                                                    0.36                                                  1.2
AMR has a much lower debt-equity ratio of 0.36, which is expected to remain stable, and its debt is risk free. AMR’s corporate tax rate is 25%, the risk-free rate is 5.5%, and the expected return on the market portfolio is 11.3%.
a. Estimate AMR’s equity cost of capital.
b. Estimate AMR’s share price.

Jun 09 2021 View more View Less

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