Problem 14-12 Stock Repurchase Bayani Bakery\'s most recent FCF was $50 million;
ID: 2720642 • Letter: P
Question
Problem 14-12
Stock Repurchase
Bayani Bakery's most recent FCF was $50 million; the FCF is expected to grow at a constant rate of 6%. The firm's WACC is 12% and it has 15 million shares of common stock outstanding. The firm has $30 million in short-term investments, which it plans to liquidate and distribute to common shareholders via a stock repurchase; the firm has no other nonoperating assets. It has $370 million in debt and $58 million in preferred stock.
What is the value of operations? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million
Immediately prior to the repurchase, what is the intrinsic value of equity? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million
Immediately prior to the repurchase, what is the intrinsic stock price? Round your answer to the nearest cent.
$ per share
How many shares will be repurchased? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
million shares
How many shares will remain after the repurchase? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
million shares
Immediately after the repurchase, what is the intrinsic value of equity? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million
The intrinsic stock price? Round your answer to two decimal places.
$ per share
Explanation / Answer
1) Value of Operations = Free Cash Flows * (1 + growth rate) / (WACC - growth rate)
Value of operations=50*(1+.06) / (.12-.06) =883.33m
2) Instrinsic value of equity= Total corporate value-Claims on corporate value
Total corporate value=Value of operations+ Short term investments
Total corporate value=883.33+ 30=913.33m
Claims on corporate value=370+58=428m
Instrinsic value of equity=913.33-428=485.33m
3) Instrinsic stock price= Instrinsic value of equity/Number of outstanding shares
Instrinsic stock price= 485.33/15=32.35 per share
4) Shares repurchased out of money from short term investments which value 30m
Instrinsic value of stock=32.35 per share
Number of shares repurchased=30m/32.35=927357 shares
5) Number of shares left after repurchase=Total number of shares before repurchase-Number of shares repurchased=15000000-927357=14072643 shares
6) Instrinsic value of equity after repurchase=Total corporate value-Claims on corporate value
Total corporate value=883.33m
Claims on corporate value=428m
Instrinsic value of equity=883.33-428=455.33m
7) Instrinsic stock price after repurchase
Instrinsic stock price=Instrinsic value of equity/Number of outstanding shares=455330000/14072643=32.35 per share
No change in instrinsic stock price after repurchase.