Ipo Case Paper Tom
Prepare an analysis of the Tom.Com case. Present your findings in a report to Andy Lau not to exceed three single-spaced typed page, plus relevant exhibits. The report should not be in question and answer format, but it should address the following questions. Include a brief introduction, analysis, and summary/conclusion.
(a) Size up Tom.Com, Ltd. Assess Tom’s business model, revenue model, potential risks, and major shareholders.
(b) Consider the valuation of Internet stocks versus “traditional” firms. What are the similarities? What are the differences?
(c) Consider the following three methods for estimating the value of Tom.Com. Clearly state and be prepared to defend any assumptions. What is Tom’s worth compared to the suggested IPO price?
Data Summary:
Total shares after IPO 2,849,000,000
Risk-free rate 6%
Market risk premium 6%
Estimated required return for Tom 15%-25%
Tom’s 1999 revenue $51,695,000
Tom’s tax rate 15%
Method 1 - Implied Average Annual Revenue Growth Rate -Use the spreadsheet to compute this growth rate for the three scenarios. Using the Goal Seek tool in Excel, estimate the Market Capitalization at IPO if the Implied Average Annual Growth Rate is 50%.
Method 2 - Discounted Cash Flow-Again use the spreadsheet. Consider using scenario and sensitivity analysis.
Revenue growth 2000-2004 80%
Revenue growth 2005-2009 30%
Operating margin 2000-2002 -150% (after tax)
Operating margin 2003-2009 5% (after tax)
Beta 2000-2004 1.8
Beta 2005 0.5
Debt/Assets 2000-2004 0
Debt/Assets 2005 50%
Cost of debt 2005 9%
Capital expenditures 2000-2002 $200 million above depreciation
Capital expenditures 2003 Same as depreciation
Net working capital 8% of revenue
Terminal growth rate 5%
Method 3 - Relative Valuation Using Trading Multiples - Consider the usefulness of the following multiples to valuing Tom.Com: Price/Earnings, Price/Sales, Price/Book.
(a) What would you recommend to
(a) Size up Tom.Com, Ltd. Assess Tom’s business model, revenue model, potential risks, and major shareholders.
(b) Consider the valuation of Internet stocks versus “traditional” firms. What are the similarities? What are the differences?
(c) Consider the following three methods for estimating the value of Tom.Com. Clearly state and be prepared to defend any assumptions. What is Tom’s worth compared to the suggested IPO price?
Data Summary:
Total shares after IPO 2,849,000,000
Risk-free rate 6%
Market risk premium 6%
Estimated required return for Tom 15%-25%
Tom’s 1999 revenue $51,695,000
Tom’s tax rate 15%
Method 1 - Implied Average Annual Revenue Growth Rate -Use the spreadsheet to compute this growth rate for the three scenarios. Using the Goal Seek tool in Excel, estimate the Market Capitalization at IPO if the Implied Average Annual Growth Rate is 50%.
Method 2 - Discounted Cash Flow-Again use the spreadsheet. Consider using scenario and sensitivity analysis.
Revenue growth 2000-2004 80%
Revenue growth 2005-2009 30%
Operating margin 2000-2002 -150% (after tax)
Operating margin 2003-2009 5% (after tax)
Beta 2000-2004 1.8
Beta 2005 0.5
Debt/Assets 2000-2004 0
Debt/Assets 2005 50%
Cost of debt 2005 9%
Capital expenditures 2000-2002 $200 million above depreciation
Capital expenditures 2003 Same as depreciation
Net working capital 8% of revenue
Terminal growth rate 5%
Method 3 - Relative Valuation Using Trading Multiples - Consider the usefulness of the following multiples to valuing Tom.Com: Price/Earnings, Price/Sales, Price/Book.
(a) What would you recommend to