Melanee is a financial analyst in Bidget Corp. As part of her analysis of the an
ID: 2754519 • Letter: M
Question
Melanee is a financial analyst in Bidget Corp. As part of her analysis of the annual distribution poicy and its impact on the firm’s value, she makes the following calculations and observations: The company generated a free cash flow of $120 million in it’s most recent fiscal year. The firms cost of capital is 12% 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 30.00 million shares outstanding The company has $320 million in debt and $200 million in preferred stock Along with the rest of the financial team, Melanee has been part of board meetings and knows that the company is planning to distribute $105 million, which is invested in short term investments, to its shareholders by buying back stock from it’s shareholders. Melanee also observed that at this point aport from the $105 million in short term investments, the firm has no other nonoperating assets. Solve for: 1.Value of the firm’s operations- 2.Intrinsic value of equity immediately- 3.Intrinsic stock price immediately prior to the stock repurchase- 4.Number of shares repurchased- 5.Intrinsic value of equity immediately after the stock repurchase- 6.Intrinsic value price immediately after the stock repurchase-
Possible answers are- Intrinsic value of Equity before sale it has to be a. 2473 mill B. 2353 mil C. 2048 mil D. 2153 mil. Intrinsic stock price before repurchase choices are A. 82.43 B. 78.43 C. 71.77 D. 68.27 Number of share repurchased it's A 1.4million B. 2.48 million C. 1.90 million D. 1.17 million. Intrinsic value price after repurchase are A. 82.43 B. 78.43 C. 71.77 D 68.27
Explanation / Answer
1)
Value of the firm’s operations = Expected free cash flow/ ( cost of capital -growth rate)
Value of the firm’s operations = 120*1.07/(12%-7%)
Value of the firm’s operations = $ 2568 Million
2) Intrinsic value of Equity before sale = Value of the firm’s operations - Debt - Prefered Stock
Intrinsic value of Equity before sale = 2568-320-200
Intrinsic value of Equity before sale= $ 2048 Million
3) Intrinsic stock price before repurchase = Intrinsic value of Equity before sale/No of shares outstanding
Intrinsic stock price before repurchase = 2048/30
Intrinsic stock price before repurchase = $ 68.27
4)
Number of share repurchased = Amount to be used for buuback/Intrinsic stock price
Number of share repurchased = 105/68.27
Number of share repurchased = 1.54 Million
5) Intrinsic value price after repurchase remain same i.e 68.27