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.
1. Describe briefly the legal rights and privileges of common stockholders.
2. What is free cash flow (FCF)? What is the weighted average cost of capital? What is the free cash flow valuation model?
3. 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?
4. Suppose the free cash flow at Time 1 is expected to grow at a constant rate of forever. If, what is a formula for the present value of expected free cash flows when discounted at the WACC? If the most recent free cash flow is expected to grow at a constant rate of forever (and), what is a formula for the present value of expected free cash flows when discounted at the WACC?
Using complete sentences and academic vocabulary, please answer questions 1 thru 4. Please don't copy from other sources. Thank you
1- Legal rights of common stock holders
1- Common stock holders can participate in
annual general meetings 2- They have voting right 3- They have
right in residual profit 4- They have a decision making
powers
2- Free cash flow refers to the cash flow available
after meeting out all the expenses, taxes, net changes in working
capital and any capital expenditure. Free cash flow refers to cash
that is available with the company without any liability for the
distribution to shareholders
Free cash flow = cash flow from operations + any
change in working capital -capital expenditure
Weighted average cost of capital refers to the
minimum required rate of return which a company should earn, this
is the least rate of return which a company should earn for its
survival.
Free cash flow valuation model when growth rate
is constant for forever current Year free cash
flow*(1+growth rate) / (WACC-growth rate)
3- Source market value of
source
bonds 500000
common stock 4000000
preferred stock 250000
retained earning 250000
total market value
5000000
3-b Debt 500000 10%
equity 4500000
90%
total 5000000
Debt 10%
equity 90%
total 100%
Equity is a residual claim because dividend is
distributed after the fixed financial commitments and also in the
case of liquidation they get payment is last.
4- terminal value of stock = expected free cash
flow/(WACC-growth rate)
present value of free cash flow = expected free
cash flow/(1+r)^1 + terminal value/(1+r)
4-2 present value of free cash flow = current free cash
flow*(1+r)/(1+r)^1 + terminal value/(1+r)
Your employer, a mid-sized human resources management company, is considering expansion into related fields, including the...
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...
Your employer, a mid-sized human resources management company, is considering expan- sion 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 Bigger staff & 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...
Mini Case 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...
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