Mega Corporation has been operating successfully for a number of years and needs additional capital to meets its expansion strategy. Warren Tuffett, a wealthy businessman, contributes $100 million of cash in exchange for shares in Mega. Mega will need to recognize income for the contribution. True or False?
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Mega Corporation has been operating successfully for a number of years and needs additional capital to meets its expansion strategy. Warren Tuffett, a wealthy businessman, contributes $100 million of cash in exchange for shares in Mega. Mega will need to recognize income for the contribution.
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- You have been asked to value Brilliant Enterprises, a publicly traded IT services firm, and have collected the following information: After-tax operating income last year = $100 million Net income last year = $82.5 million Book value of equity at start of this year = $750 million Book value of debt at start of this year = $250 million Capital expenditure last year = $80 million Depreciation last year = $30 million Increase in non-cash working capital last year = $10 million a) Assuming that Brilliant Enterprises will maintain its return on capital and reinvestment rate from last year for the next 3 years, estimate the free cash flow for the company for each of the next 3 years. b) After year 3, Brilliant expects its growth rate to decline to 3% and the return on capital to be 9% in perpetuity. Assuming that its cost of capital is 8%, estimate the terminal value at the end of the third year. c) Assuming that Brilliant has a cost of capital of 10% for the next 3…Your employer, a mid-sized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporary heavy workloads. Your employer is also considering the purchase of Biggerstaff & McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&M’s financial statements report short-term investments of $100 million, debt of $200 million, and preferred stock of $50 million. B&M’s weighted average cost of capital (WACC) is 11%. Answer the following questions. Describe briefly the legal rights and privileges of common stockholders. What is free cash flow (FCF)? What is the weighted average cost of capital? What is the free cash flow valuation model? Use a pie…Your employer, a midsized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. Your employer is also considering the purchase of Biggerstaff & McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&M’s financial statements report short-term investments of $100 million, debt of $200 million, and preferred stock of $50 million. B&M’s weighted average cost of capital (WACC) is 11%. Use a pie chart to illustrate the sources that comprise a hypothetical company’s total value. Using another pie chart, show the claims on a company’s value. How is equity a residual claim? Suppose the free cash flow at Time 1 is…
- Your employer, a midsized human resources management company, is considering expansion into related fields, including the purchase of Biggerstaff & McDonand (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&M’s financial statements report short-term investments of $100 million, debt of $200 million, and preferred stock of $50 million. B&M’s weighted average cost of capital (WACC) is 11%. Use B&M’s data and the free cash flow valuation model to answer the following questions: What is its estimated intrinsic value of equity? What is its estimated intrinsic stock price per share?Your employer, a midsized human resources management company, is considering expansion into related fields, including the purchase of Biggerstaff & McDonand (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&M’s financial statements report short-term investments of $100 million, debt of $200 million, and preferred stock of $50 million. B&M’s weighted average cost of capital (WACC) is 11%. Use B&M’s data and the free cash flow valuation model to answer the following questions: What is the estimated value of operations? What is the estimated total corporate value? (this is the entity value.) What is its estimated intrinsic value of equity? What is its estimated intrinsic stock price per share?The Lohr Company needs $40 million in cash to expand several of its facilities. Company officials chose to issue bonds to raise this money rather than capital stock. What are some of the possible reasons for this decision?
- The founder of Alchemy Products Incorporated discovered a way to turn gold into lead and patented this new technology. He then formed a corporation and invested $2,400,000 in setting up a production plant. He believes that he could sell his patent for $75 million. What is the book value of the firm? Note: Enter your answer in dollars not in millions. What is the market value of the firm? Note: Enter your answer in dollars not in millions. If there are 2 million shares of stock in the new corporation, what is the book value per share? Note: Round your answer to 2 decimal places. If there are 2 million shares of stock in the new corporation, what is the price per share? Note: Round your answer to 2 decimal places.Ethelbert.com is a young software company owned by two entrepreneurs. It currently needs to raise $1,746,400 to support its expansion plans. A venture capitalist is prepared to provide the cash in return for a 40% holding in the company. Under the plans for the investment, the VC will hold 23,600 shares in the company and the two entrepreneurs will have combined holdings of 35,400 shares. a. What is the total after-the-money valuation of the firm? (Enter your answer in dollars not millions.) b. What value is the venture capitalist placing on each share?Your employer, a midsized human resources management company, is considering expansion intorelated fields, including the acquisition of Temp ForceCompany, an employment agency that supplies wordprocessor operators and computer programmersto businesses with temporarily heavy workloads.Your employer is also considering the purchase ofBiggerstaff & McDonald (B&M), a privately heldcompany owned by two friends, each with 5 millionshares of stock. B&M currently has free cash flow of$24 million, which is expected to grow at a constant rate of 5%. B&M’s financial statements reportshort-term investments of $100 million, debt of $200million, and preferred stock of $50 million. B&M’sweighted average cost of capital (WACC) is 11%.Answer the following questions: . (1) Write out a formula that can be used to valueany dividend-paying stock, regardless of itsdividend pattern.(2) What is a constant growth stock? How areconstant growth stocks valued?(3) What happens if a company has…
- Company A and Company B are identical firms in every way except for their capital structure (Company B uses perpetual debt). The EBIT for both companies is expected to be $20 million forever. The shares of Company A are worth $100 million, and the shares of Company B are worth $50 million. The interest rate is 5 per cent. Michael owns $2 million of Company B’s shares. Please answer the following questions, ignoring taxes. What is rate of return for Company B? Show how Michael could generate the same cash flow and rate of return by investing in company A and using home-made leverage. What is the cost of capital for both companies? What principle does your answer illustrate?Hanuman Corp is a medium-sized corporation that has long dominated their market. With a strong cash-flow position, they have decided to invest excess cash strategically. In particular, Hanuman made periodic investments with their main supplier, Shiva. Although Hanuman currently owns 18% of the common shares of Shiva, it does have significant influence over the operations of this investee company. Hanuman Corp has a December 31st year end. Before 2020, Hanuman had invested $22.4 million in Shiva and, at December 31, 2019, the investment had a fair value of $21.3 million. Hanuman did not sell or purchase any Shiva shares this year. Hanuman declared and paid a dividend totalling $2.2 million on all its common shares and reported 2020 net income of $13.6 million. Hanuman’s 18% ownership of Shiva has a December 31, 2020, fair value of $21,405,000. Required: Prepare the appropriate entries for the Shiva investment, for 2020