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.
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