Chapter 7 MINI CASE
Your employer, a mid-sized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporary heavy workloads. Your employer is also considering the purchase of a Biggerstaff & Biggerstaff (B&B), a privately held company owned by two brothers, each with 5 million shares of stock. B&B currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&B’s financial statements report marketable securities of $100 million, debt of $200 million, and preferred stock of $50 million. …show more content…
A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.
What is the free cash flow valuation model?
Free Cash Flow = Net Income + Depreciation + Deferred Taxes – Dividends Paid- Capital Expenditures
j. Use a pie chart to illustrate the sources that comprise a hypothetical company’s total value. Using another pie chart, show the claims on a company’s value. How is equity a residual claim?
k. Use B&B’s data and the free cash flow valuation model to answer the following questions. (1) What is its estimated value of operations?
Operating Income = Revenue - Cost of Goods Sold (COGS), Labor, and day-to-day expenses= 24000000-
(2) What is its estimated total corporate value?
Total corporate value = Value of operations + marketable securities= + (3) What is its estimated intrinsic value of equity?
Intrinsic value of equity = Total net worth of company/ Total