McCaffrey\'s Inc. has never paid a dividend, and when the firm might begin payin
ID: 2798177 • Letter: M
Question
McCaffrey's Inc. has never paid a dividend, and when the firm might begin paying dividends is not known. Its current free cash flow (FCF) is $100,000, and this FCF is expected to grow at a constant 7% rate. The weighted average cost of capital (WACC) is 11%. McCaffrey's currently holds $325,000 of non-operating marketable securities. Its long-term debt is $1,000,000, but it has never issued preferred stock. McCaffrey's has 50,000 shares of stock outstanding. Please show how you ot the work!!!
3a. Calculate McCaffrey's value of operations. Vop = FCF(1+g) = = $ WACC - g 3b. Calculate the company's total value. Total Value = Value of Operations + Value of nonoperating assets = $ + $ = $ 3c. Calculate the estimated value of common equity. Value of equity = Total value - Value of debt = $ - $ = $ 3d. Calculate the estimated per-share stock price. Price per share = Value of Equity ÷ Number of Shares = $ ÷ $ = $McCaffrey's Inc. has never paid a dividend, and when the firm might begin paying dividends is not known. Its current free cash flow (FCF) is $100,000, and this FCF is expected to grow at a constant 7% rate. The weighted average cost of capital (WACC) is 11%. McCaffrey's currently holds $325,000 of non-operating marketable securities. Its long-term debt is $1,000,000, but it has never issued preferred stock. McCaffrey's has 50,000 shares of stock outstanding. Please show how you ot the work!!!
Explanation / Answer
3a)Value of operations =FCF(1+g)/(WACC-g)
= 100000(1+.07)/(.11-.07)
= 100000*1.07/.04
= $ 2675000
3b)Total value : 2675000+325000
= $ 3,000,000
3c)Value of equity =Total value -value of debt
= 3,000,000-1,000,000
= 2,000,000
3d)price per share =value of equity /shares outstanding
= 2,000,000/50,000
= $ 40