McCaffrey\'s Inc. has never paid a dividend, and when the firm might begin payin
ID: 2798181 • 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
3 a) Value from operations
FCFF(1+g)/k-g = 100,000(1+7%)/(11%-7%) = $ 2,675,000
b)
Total Value = Value from Operations + Value of Non operating assets
Total Value = 2,675,000+ 325,000 = $ 3,000,000
c)
Value of Equity = Total Value - Value of debt = 3,000,000 - 1,000,000 = $ 2,000,000
d)
Price per share = Value of Equity/Number of shares = (2,000,000)/ 50,000 = $ 40