Summarize and discuss the implications of the findings for the business or potential business transaction.----------------McCaffrey's Inc. has never paid a dividend, and when the firm might begin paying dividends is not known. Its current free cash flow (FCF) is $100,000, and this FCF is expected to grow at a constant 7% rate. The weighted average cost of capital (WACC) is 11%. McCaffrey's currently holds $325,000 of non-operating marketable securities. Its long-term debt is $1,000,000, but it has never issued preferred stock. McCaffrey's has 50,000 shares of stock outstanding.McCaffrey's value of operations - $2,675,000The company's total value - $3,000,000The estimated value of common equity - $2,000,000The estimated per-share stock price - $40

Question
Asked Nov 17, 2019
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Summarize and discuss the implications of the findings for the business or potential business transaction.

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McCaffrey's Inc. has never paid a dividend, and when the firm might begin paying dividends is not known. Its current free cash flow (FCF) is $100,000, and this FCF is expected to grow at a constant 7% rate. The weighted average cost of capital (WACC) is 11%. McCaffrey's currently holds $325,000 of non-operating marketable securities. Its long-term debt is $1,000,000, but it has never issued preferred stock. McCaffrey's has 50,000 shares of stock outstanding.

  1. McCaffrey's value of operations - $2,675,000
  2. The company's total value - $3,000,000
  3. The estimated value of common equity - $2,000,000
  4. The estimated per-share stock price - $40
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Expert Answer

Step 1

Computation of McCaffrey’s value of operation:

Hence, the value of operation is $2,675,000.

FCFX(1+g)
WACC-g
Value of operati on -
s100, 000x (17%)
(11%-7%)
=S2,675,000.00
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FCFX(1+g) WACC-g Value of operati on - s100, 000x (17%) (11%-7%) =S2,675,000.00

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Step 2

Computation of total value of the company:

Hence, the total value is $3,000,000.

Company'stotal value Value of operati ons +Value of nonoperating assets
=S2,675,000+ $325,000
=S3,000, 000
help_outline

Image Transcriptionclose

Company'stotal value Value of operati ons +Value of nonoperating assets =S2,675,000+ $325,000 =S3,000, 000

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Step 3

Computation of estimated value of total equity:

Hence, the value of equity is $2,000,000.

...
Value of equity Total value - Value of debt
=S3,000,000-$1,000, 000
=S2,000, 000
help_outline

Image Transcriptionclose

Value of equity Total value - Value of debt =S3,000,000-$1,000, 000 =S2,000, 000

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