A private equity (PE) firm is attempting to value the stock of “StartMeUp” using the concept that the value of an asset
Posted: Mon May 02, 2022 9:26 am
A private equity (PE) firm is attempting to value the stock of
“StartMeUp” using the concept that the value of an asset is the
present value of future cash flows. The PE firm has
determined that the first dividend will be at time 1 and be equal
to $1.00. Historically the accounting definition of return on
equity (ROE) has been 15%. Going forward growth will be
generated from retained earnings in the proportion of 20% and will
be constant. The firm doesn’t have any debt so that it is
unlevered.
Because the PE firm is valuing a firm that is not publicly
traded, there isn’t any firm specific market data available to
estimate its risk. The return on the market portfolio is
RM=14% and the risk-free rate is
rf=2%.
Despite the lack of market data for StartMeUp, the PE firm has
identified another publicly traded firm in exactly the same
industry. That firm has a beta of 1.5, a debt-to-equity ratio
of 0.8, and a tax rate of 25%.
Find the price of one share of StartMeUp.
“StartMeUp” using the concept that the value of an asset is the
present value of future cash flows. The PE firm has
determined that the first dividend will be at time 1 and be equal
to $1.00. Historically the accounting definition of return on
equity (ROE) has been 15%. Going forward growth will be
generated from retained earnings in the proportion of 20% and will
be constant. The firm doesn’t have any debt so that it is
unlevered.
Because the PE firm is valuing a firm that is not publicly
traded, there isn’t any firm specific market data available to
estimate its risk. The return on the market portfolio is
RM=14% and the risk-free rate is
rf=2%.
Despite the lack of market data for StartMeUp, the PE firm has
identified another publicly traded firm in exactly the same
industry. That firm has a beta of 1.5, a debt-to-equity ratio
of 0.8, and a tax rate of 25%.
Find the price of one share of StartMeUp.