Forbes, May 28, 2020 “Big Hit Entertainment (BHE), the South Korean company that houses BTS and several other K-pop acts

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Forbes, May 28, 2020 “Big Hit Entertainment (BHE), the South
Korean company that houses BTS and several other K-pop acts, filed
for an initial public offering (IPO).” IPO means that the common
stock of BHE becomes available in the stock exchange for public
trading. After reading this article, you valued BHE’s stock.
Financial information for 2019 (Unit: billion won, except for
%)
 Sales: 587 EBIT: 105 Depreciation: 5 CAPEX: 25 Net
Income: 78.15
 No working capital investment
 Interest Expense*(1-t) = 0.6 Change in net debt = – 10
(note the minus sign!)
 Tax rate = 25%, Capital structure and tax rate will
remain unchanged.
 Number of shares outstanding = 35,623,760 shares
(10 pts) Actually, the price of the BHE stock at IPO was
determined at 135,000 won per share and some investors said shares
were overvalued.
(1) Explain possible reason for overvaluation using at least two
inputs that you used in the valuation. Your
answer should be specific to the overvaluation (and not
undervaluation).
(2) Considering the possible problems associated with discounted
free cash flow valuation, which alternative valuation method would
you recommend? Explain briefly.