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Helen Troy started a Teabucks teashop in Troy, Michigan a few years ago. She formed a corporation, and owned all the shares of this corporation.

Helen Troy started a Teabucks teashop in Troy, Michigan a few years ago. She formed a corporation, and owned all the shares of this corporation. She played various roles as the CEO and a cashier. Fortunately for Helen her teashop became very popular and her firm grew at a very rapid pace. She expanded her business to all the big cities. She added more staff and even hired a MBA graduate from the University of Michigan. The firm has negligible debt, and all the growth has been financed with equity. The stock was owned by only a few individuals and hence a privately held corporation. Therefore no market price has been established for the stock. Now she wants to expand into tea packaging and tea bottling operations, which require large investment outlays. So Helen decided to take her company public. Valuation of a privately held firm requires:

Teabucks Income statement (in $Million and rounded to nearest million)

Total Revenue 750
Costs of goods sold 575
Gross profit 175
Selling and Administrative expenses 40
Depreciation / Amortization 45
Other expenses 25
Income before taxes (EBIT) 65
Taxes (38%) 25
Net Income 40

Industry Average Starbucks
P/E Ratio 35 52
Price / Sales Ratio 2.0 3.75
Price / cash Flow 20 28

How many shares would you issue and at what price would you offer Teabuck s?

Discuss if you would use traditional method of issuing the IPO or the Internet to issue the IPO as Google did. Discuss the pros and cons in each case

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