Suppose that JML Corp. has outstanding debt, preferred stock, and common stock.
ID: 2775664 • Letter: S
Question
Suppose that JML Corp. has outstanding debt, preferred stock, and common stock. For this year, the firm
expects to have sales of $5,000 million, cost of goods sold of $3,500 million, operating expenses (including
depreciation expenses) of $650 million, an upper marginal corporate tax rate of 36%, depreciation expenses of
$200 million, an annual increase in capital expenditures of $10 million (mainly for replacement and
maintenance issues), an increase of account receivables and cash by $125 million, increases of accounts payable
and accrued expenses of $110 million, interest expenses of $400 million, and a retirement of debt of $10 per
annum. Note that the firm does not pay common stock dividends.
a.) What is JML's common stock price using the Gordon Growth Model?
b.) What is JML's common stock price using the Dividend Growth Model?
c.) What is JML's Free Cash Flows for this year?
d.) What is JML's Free Cash Flow to Equity Holders for this year?
e.) If JML Corp. has a fixed, annual cost of common equity of 10%, what is the total value of JML Corp.
if the firms has a fixed, annual Free Cash Flow to Equity holder growth rate of 5%?
f.) If JML Corp. has a total amount of debt worth $1386 million and $1,511 million in preferred equity
outstanding, what is the total residual value of JML's common equity
g.) Based on your answer to part f, what is JML Corp's common equity price per share if the firm has
187 million shares outstanding?
i.) Repeat parts e through g assuming that the firm has no Free Cash Flow to Equity holder growth rate.
h.) Repeat parts e through h assuming that the information provided to you actually pertains to next year
Explanation / Answer
a)
Common stock price using Gordan model cannot be computed as there is no data regarding equity shares.
b)
Common stock price using Dividend growth model cannot be computed as there is no data regarding equity shares.
c)
Free cash flows are as follows:
Particulars
Amount
Sales
5,000
Less:
Cost of goods sold
3,500
Gross profit
1,500
Less:
Operating expense
650
Interest expense
400
Net profit
450
Less:
Tax @36%
162
Net profit after tax
288
Add:
Depreciation
200
Free cash flows
488
Thus, the free cash flow is$488.
Particulars
Amount
Sales
5,000
Less:
Cost of goods sold
3,500
Gross profit
1,500
Less:
Operating expense
650
Interest expense
400
Net profit
450
Less:
Tax @36%
162
Net profit after tax
288
Add:
Depreciation
200
Free cash flows
488