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1. Etna Tech is a company set up by two friends, Larry and Mike. The company’s...

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Finance

1. Etna Tech is a company set up bytwo friends, Larry and Mike. The company’s only product is apopular online game called Fisticuffs. Etna Tech will be holding anIPO of 5 million shares tomorrow. Market expectations are high forthis IPO. The company is expected to pay $1 per share starting oneyear from now. The dividends are then expected to grow at asupernormal rate of 30% for three years, before dropping down to15% for three more years, and then to 5% afterwards. What is thetotal value of this IPO if the required return for similar issuesis 18%?  

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4.1 Ratings (481 Votes)
AnswerNumber of shares of the IPO 5 millionLet us calculate share value per share based on expecteddividend payments using dividend discount    See Answer
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1. Etna Tech is a company set up bytwo friends, Larry and Mike. The company’s only product is apopular online game called Fisticuffs. Etna Tech will be holding anIPO of 5 million shares tomorrow. Market expectations are high forthis IPO. The company is expected to pay $1 per share starting oneyear from now. The dividends are then expected to grow at asupernormal rate of 30% for three years, before dropping down to15% for three more years, and then to 5% afterwards. What is thetotal value of this IPO if the required return for similar issuesis 18%?  

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