Note: these are the numerical answ

tax rate 30%

Qs 1 Pre-IPO
PLEASE DO NOT P
w/o tax w/tax
Revenues 40 40
Operating Cost 4 10% 4
SG&A 2 5% 2 Note that because of the structure of this problem we
Capex 4 10% 4 FCFs for more than a single years as already in year
R&D 16 40% 16 subsequent years; for other problems we normally p
Depreciation 2.4 60% 2.4 years until we are in steady state and then we make t
Year 0 1 1
1-Jan-17 1-Jan-18
FCF 14.0 9.32
TV 2% 86 57
TV 15% 439 292
PV @2% 84 56 These are the values of the firm, and are equivalent t
PV @15% 381.5 254.0 or discounting it by 1 period (see image to the right)

Note discounting at r_A because the firm is all equity and there are no taxes
No Tax Pre-IPO w/Tax Pre-IPO
Growth rate 2% 15% Growth rat 2% 15%
Firm Value 84.0 381.5 Firm Value 55.9 254.0
Stock price 9.3 42.4 Stock price 6.2 28.2
beta_A 2.1
Risk Free Rate 4% 20-year bond rate
r_A 18.67%

Qs 2 Post-IPO
Existing shares 9
New shares 1
Total shares 10

New cash from IPO 30

PLEASE DO NOT P
No Tax
Growth rate 2% 15%
Firm Value 114.0 411.5
Stock price 11.4 41.2

Optimistic investors (believing in 15% growth) will see the IPO as a positive NPV investment; pessimistic (2% g

Qs 3 Post-IPO
w/Tax, No Debt
Growth rate 2% 15%
Firm Value 85.9 284.0
Stock price 8.6 28.4

Qs 4 Pre-IPO
total shares with 10% debt 8.1
Note: here assuming the CFO retires 10% of shares to raise the debt and kee
E/V 90%
r_D 5% Note beta_D = 0 because the comparables are investment grade at similar le
ERP 7% This means we do NOT use the CAPM to get r_D; instead we use the yield
D/E 0.11111111111