The decision to go public: the case of Tesmec S.p.A.. Review of IPO pricing assumptions and analysis of post IPO market reactions.

The Free Cash Flow (FCF), is the flow of cash generated from the current activities of the company available for distribution among all the securities holders of an organization. They include equity holders, debt holders, preferred stock holders, convertible security holders and so on.
The notion of FCF, is further extended to the beneficiaries of the flow:
• the Free Cash Flow to the Firm (FCFF) - when the cash is used in order to pay dividends, pay interests and capital of debts, increase the corporate liquidity - and,
• the Free Cash Flow to the Equity (FCFE) - when the cash is used in order to pay dividends and/or increase the corporate liquidity.

The Free Cash Flow to the Firm can be calculated from the EBIT:
FCFF = EBIT (1-Tax rate) + Depreciation & Amortization - CAPEX - Change in Working Capital - Tax effects on Capital
The value of operations is the present value of the FCFF the firm is expected to generate out into the future. The company value will be calculated as the present value of its expected future FCF from operations, discounted at its weighted average cost of capital (WACC), plus the value of its non-operating assets. Finally, the company value depends on its ability to generate Free Cash Flows.
There are five potentially "good" ways to use FCFF: 1) pay interest expenses; 2) pay down the principal on debt; 3) pay dividends; 4) repurchase stock or 5) buy non-operating assets such as Treasury bill or other marketable securities.

In our analysis we have adopted the following assumptions:
• cash flow growth: we calculated cash flows until 2009 and then we assumed the following cash flow growth:
a) Case A: an average growth of 2,50% per year in the first stage (2010-2012) and of 1,80% in the second stage (2013-14);
b) Case B: an average growth of 0,75% per year in the first stage (2010-2012) and of 0,50% in the second stage (2013-14);
• perpetual growth rate (g): a) Case A: 1,50 % and b) Case B: 0,30%;
• discount rate of the terminal value: WACC = 6,30%. [...]