Question

Charlize is a financial analyst in RTE Telecom Inc'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 8% for the past six years but is expected to grow at a constant rate of 7% 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, Charlize has been part of board meetings and knows that the company is planning to distribute $105.00 million, which is invested in short-term investments, to its shareholders by buying back stock from its shareholders. Charlize also observed that, at this point, apart from the $105.00 million in short-term investments, the firm has no other nonoperating assets. Using results from Charlize'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 Based on your understanding of stock repurchases, identify whether the following statement is true or false: The value of operations depends on whether a firm decides to make distributions in the form of dividends or stock repurchases. because ignoring possible tax effects and signals, the value of a firm's operations This statement is depend on how the firm distributes its residual earnings.

Options for last statement: true / false ; does not / does.

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

NPV, IRR, PBP,OCFINDEX - Microsoft Excel (Product Activation Failed) View Add-Ins Formulas Data Review - 2x 11 A A = = = V General Wrap Text Merge & Center - Σ AutoSum : A Fill 2 m Sort & Find & A -28.9 Insert Delete Format File Home Insert Page Layout % Cut Calibri Ea Copy Paste BI U D Format Painter Clipboard Font HL538 foc HD HE HE $ -% Number Conditional Format Cell Formatting as Table Styles Styles 2 Clear Filter Editing Select Alignment Cells HG HH HI HJ HK H L HM HN HO HP 538 539 1 value of operations = Value of operations = Value of operations = FCF(1+g)/(WACC-8) 45(1+0.07)/(0.14-0.07) 687.86 MILLION 540 541 542 543 544 545 546 547 548 2 Immediately prior to repurchase, intrinsic value of equity total value of the firm = value of operations + value of short term investment total value of the firm = 687.86 + 105 = 792.86 MILLION intrinsic value of equity = total value of firm - debt - preferred stock intrinsic value of equity = 792.86-120 - 75 = 597.86 MILLION 549 550 551 552 3 intrinsic stock price prior to repurchase intrinsic value of equity/ no of common shares outstanding 597.86/11.25 = 53.14286 rounding to two digits = 53.14 4 no of shares repurchased 105 MILLION /53.14286 = 1.97581 million 1.98 million 553 554 555 556 H O FCFARM, MSI,confidenceINDEX CURRENCY LOAN CROSS OVER HEDGING MONEY MARKET GM HPR AM TAX GROWTH SUST CF CASH FLOW STATW ferences: EV46 PREF AND DIV POLICY BO 130% I Red 0 + 2. 9 * * ENG 25-11-2019

NPV, IRR, PBP,OCFINDEX - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut A = = = V General 11 B- A A Wrap Text Merge Merge & Center - Center Σ AutoSum : A Fill 2 m Sort & Find & U SF $ 4:0 .00 :.: Insert Delete Format % % , Number Conditional Format Formatting as Table Styles Cell Styles 2 Clear Filter Editing Select Font Alignment Cells Calibri E Copy Paste Format Painter B I Clipboard HL574 - HDHE 556 557 five HH HI HJ HK HL HM HN HO HP 558 9.27419 MILLION 9.27 MILLION 559 560 561 no of shares after repurchase 11.25 MILLION - 1.97581 MILLION ROUNDED TO 2 DECIMAL 5 after repurchase, intrinsic value as short term investments are sold off intrinsic value of equity = 597.86 -105 = 6 after repurchase, intrinsic stock price 492.86/9.27419 = 53.14285714 rounding to two digits = 53.14 562 492.86 563 564 565 566 567 568 687.86 597.86 1.98 492.86 569 ANSWERS 1. value of firm's operations 2. intrinsic value of equity prior to repurchase 3. intrinsic stock price prior to repurchase 4. no of shares repurchased 5. intrinsic value of equity after to repurchase 6. intrinsic stock price after to repurchase 53.14 53.14 570 571 572 573 574 THIS STATEMENT IS FALSE VALUE OF OPERATIONS DOES NOT CF CASH FLOW STATW FCFARM, MSI,confidenceINDEX CURRENCY ferences: EV46 H O LOAN CROSS OVER HEDGING MONEY MARKET GM HPR AM TAX GROWTH SUST PREF AND DIV POLICY BO 130% I Rea 0 + 9 . * ENG 25-11-2019