Hop-in Food Stores Inc Essay

Hop-In Foods Stores has historic aloney been able to rely on intimate financing and long term debt in order to continue its growth. The go along growth is attributed to acquisitions of already established stores. Hop-In prudence has predominantly stayed away from jump up new stores from scratch due to high start up costs. They had found forbidden that it was easier and more cost effective to buy up smaller stores in good locations. As of 1976 all of Hop-Ins elaborateness was payd by long term debt or equity shed out by upper management.Prior to 1976, Hop-In had had common assigns outstanding, but was primarily traded simply in Virginia. In order to continue the growth and expansion that management wanted they had to come up with additional funds. Equity financing was the practice to the Hop-In Food Stores need for the additional monies needed to cover growth costs. one of the main risks of IPO offerings is the risk of underpricing. This offer be costly to two Hop-In and the enthronement bank. If the market decides that Hop-Ins grade is worth more than initially offered stock damages with rise, leaving additional money that could need been raised by the company.This money left on the table could have been used to finance other investments or pay down any outstanding debts. The investment bank takes on the risk from the standpoint that they did not properly set the stock price. The underpricing of stock means that they did not maximize the money Hop-In could have raised. The reputation of not properly valuing IPO prices tail lead to incapacitated future business. In order to determine Hop-Ins new exit price, Mr. Merriman must first forecast the next five years of trim cash flows.He should first create pro forma balance sheets and income statements. erst the financial have been forecasted the next step is to figure out what innocent cash flows are. This can be by multiplying EBIT*(1-tax), adding gage depreciation, subtracting the change in capital expenditures, and also subtracting the change in net working capital. This leave alone give you vindicate cash flows for the year. These numbers need to be compulsive on a yearly basis of at least 5 years into the future. The next step is then to find out the WACC, aka r, of the company.This can be found by the equation, rd(1-tax)(D/V)+re(E/V). Once WACC is found all of the free cash flows need to be discounted back to present values. Another operator that must be found is growth. This can be discovered by doing a industry analysis to determine what the growth rate is expect to be. The growth rate is used to find the terminal value of Hop-In at its horizon date (5 years out). This terminal value is then discounted back to present value. The summation of all PV cash flows plus PV of the terminal value give you the value of the unfluctuating.The last step is to subtract the debt of the firm to acres at the current equity value of the company. This equity value can then be divided by the number of shares outstanding or planning on being offered to come up with the IPO share price. Mr. Merriman has a difficult decision deciding what the final offering price entrust be. He has guaranteed a low value of $10 per share. He obviously wants it to close at a price higher than this because his firm will take a substantial loss since they will leveraging all the shares from Hop-In Foods.Investment banks usually give a range of contingent prices instead of a single definite stock price. This range will consist of the low value of $10, plus 6% in fees, free a final low value of $10. 60. The high value is measured by redoing the firm value analysis taking away all debt and making it an entirely equity financing company. Doing the same before mentioned sour will give you a high value. In the end Mr. Merriman should cleanse a final offering price right in the substance of the low and high value.