As part of her analysis of the annual distribution policy and its impact on the firm’s value, she makes the following calculations and observations: • The company generated a free cash flow (FCF) of $45.00 million in its most recent fiscal year. • The firm’s cost of capital (WACC) is 14%. The firm has been growing at 10% for the past six years but is expected to grow at a constant rate of 8% in the future. • The firm has 11.25 million shares outstanding. • The company has $120.00 million in debt and $75.00 million in preferred stock. Along with the rest of the finance team, Elle has been part of board meetings and knows that the company is planning to distribute $120.00 million, which is invested in short-term investments, to its shareholders by buying back stock from its shareholders. Elle also observed that, at this point, apart from the $120.00 million in short-term investments, the firm has no other nonoperating assets. Using results from Elle’s calculations and observations, solve for the values in the following tables. (Note: Round your answers to two decimal places.) Value Value of the firm’s operations ? Intrinsic value of equity immediately prior to stock repurchase ? Intrinsic stock price immediately prior to the stock repurchase ?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter4: Financial Planning And Forecasting

Section: Chapter Questions

Problem 7P

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As part of her analysis of the annual distribution policy and its impact on the firm’s value, she makes the following calculations and observations:

•	The company generated a free cash flow (FCF) of $45.00 million in its most recent fiscal year.
•	The firm’s cost of capital (WACC) is 14%. The firm has been growing at 10% for the past six years but is expected to grow at a constant rate of 8% in the future.
•	The firm has 11.25 million shares outstanding.
•	The company has $120.00 million in debt and $75.00 million in preferred stock.

Along with the rest of the finance team, Elle has been part of board meetings and knows that the company is planning to distribute $120.00 million, which is invested in short-term investments, to its shareholders by buying back stock from its shareholders. Elle also observed that, at this point, apart from the $120.00 million in short-term investments, the firm has no other nonoperating assets.

Using results from Elle’s calculations and observations, solve for the values in the following tables. (Note: Round your answers to two decimal places.)

	Value
Value of the firm’s operations	?
Intrinsic value of equity immediately prior to stock repurchase	?
Intrinsic stock price immediately prior to the stock repurchase	?

	Value
Number of shares repurchased	?
Intrinsic value of equity immediately after the stock repurchase	?
Intrinsic stock price immediately after the stock repurchase	?

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