Question

Remember that the primary goal of a firm is to maximize shareholder wealth by increasing the firm's intrinsic value. It is thus important to understand the impact of distributions-both in the form of dividends or stock repurchases on the firm's value. Consider the following situation: Elle is a financial analyst in Demo You Ine's. 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

Answer 1

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NPV, IRR, PBP,OCF, INDEX - Microsoft Excel (Product Activation Failed) Formulas File Home Insert Page Layout Data Review View Add-Ins E AutoSum Cut AC Wrap Text Calibri 11 General E Copy Fill Merge & Center $ % Insert Delete Format Paste в IUT 090 Conditional Format Cell Sort & Find & Format Painter Formatting as Table Styles Clear Filter Select Clipboard Alignment Font Number Styles Cells Editing fox НН498 НН HD НЕ HЕ HG HI НI НК HL НM HN Но НР 498 1 value of operations = FCF(1+g)/(WACC-g) 45(1+0.08)/(0.14-0.08) 499 Value of operations 500 Value of operations 501 810 MILLION 502 2 Immediately prior to repurchase, intrinsic value of equity 503 total value of the firm value of operations value of short term investment 504 505 total value of the firm 810 120 930 MILLION intrinsic value of equity total value of firm debt - preferred stock 506 intrinsic value of equity 930 -120 - 75 507 735 MILLION = 508 3 intrinsic stock price prior to repurchase 509 intrinsic value of equity/ no of common shares outstanding 510 735/11.25 = 65.33333 511 rounding to two digits = 512 65.33 4 no of shares repurchased 513 120 MILLION/65.3333 = 1.83673 million 514 515 1.84 million 516 ARM, MSI,ConfidenceINDEX CURRENCY HEDGING MONEY MARKET GM HPR AM LOAN TAX GROWTH SUST CROSS OVER PREF AND DIV POLICY OCF CASH FLOW STATW FCF erences: EV46 130% WA 11:17 B TENG 24-11-2019

NPV, IRR, PBP,OCF, INDEX - Microsoft Excel (Product Activation Failed) Formulas File Home Insert Page Layout Data Review View Add-Ins E AutoSum Cut AC Wrap Text Calibri 11 General Copy Fill Merge & Center Conditional Format Formatting as Table Styles Insert Delete Format Paste В IU- 000 Cell Sort & Find & % Format Painter Clear Filter Select Clipboard Number Font Alignment Styles Cells Editing fox HM524 HD НЕ HЕ HG НН HI НJ НК HL НM HN Но НР 516 no of shares after repurchase 517 518 11.25 MILLION - 1.83673 MILLION 9.41327 MILLION ROUNDED TO 2 DECIMAL 519 9.41 MILLION 5 after repurchase, intrinsic value 520 as short term investments are sold off 521 intrinsic value of equity 522 735-120 = 615 523 6 after repurchase, intrinsic stock price 524 615/9.41327= 65.33333333 rounding to two digits = 525 65.33 526 ANSWERS 1. value of firm's operations 4. no of shares repurchased 527 810 1.84 2. intrinsic value of equity 5. intrinsic value of equity 528 735 615 after to repurchase 529 prior to repurchase 3. intrinsic stock price 6. intrinsic stock price 530 65.33 65.33 after to repurchase prior to repurchase 531 532 533 THIS STATEMENT IS FALSE WILL BE 534 VALUE OF OPERATIONS ARM, MSI, confidenceINDEX OCF CASH FLOW STATW HEDGING MONEY MARKET PREF AND DIV POLICY LOAN CROSS OVER TAX GROWTH SUST FCF CURRENCY GM HPR AM erences: EV46 130% WA 11:17 B TENG 24-11-2019