McCaffrey\'s Inc. has never paid a dividend, and when the firm might begin payin
ID: 2798180 • 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 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 = $ ÷ $ = $Explanation / Answer
3a. value of operations = FCF(1+g)/ (WACC - g)
=$100,000 (1+0.07)/ (0.11 - 0.07)
=$100,000 (1+0.07)/ 0.04
=$107000 / 0.04
=$2675000
3b. company's total value = Value of Operations + Value of nonoperating assets
= $2675000 + $325,000
= $3000000
3c. estimated value of common equity = company's total value - Value of debt (long term debt)
= $3000000 - $1000000
= $2000000
3d. estimated per-share stock price = Value of Equity / Number of Shares
=$2000000 / 50,000 shares
=$40 per share
3d. estimated per-share stock price = Value of Equity / Number of Shares
=$2000000 / 50,000 shares
=$40 per share