Mini Case Your employer, a midsized human resources management company, is considering expansion into related fields,...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Mini Case Your employer, a midsized 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 temporarily heavy workloads. Your employer is also considering the purchase of Biggerstaff & McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&M's financial statements report short-term investments of $100 million, debt of $200 million, and preferred stock of $50 million. B&M's weighted average cost of capital (WACC) is 11%. Answer the following questions: f. You have just learned that B&M has undertaken a major expansion that will change its expected free cash flows to -$10 million in 1 year, $20 million in 2 years, and $35 million in 3 years. After 3 years, free cash flow will grow at a rate of 5%. No new debt or preferred stock was added; the investment was financed by equity from the owners. Assume the WACC is unchanged at 11% and that there are still 10 million shares of stock outstanding. (1) What is the company's horizon value (i.e., its value of operations at Year 3)? What is its current value of operations (i.e., at Time 0)? (2) What is its estimated intrinsic value of equity on a price-per-share basis? Mini Case Your employer, a midsized 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 temporarily heavy workloads. Your employer is also considering the purchase of Biggerstaff & McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&M's financial statements report short-term investments of $100 million, debt of $200 million, and preferred stock of $50 million. B&M's weighted average cost of capital (WACC) is 11%. Answer the following questions: f. You have just learned that B&M has undertaken a major expansion that will change its expected free cash flows to -$10 million in 1 year, $20 million in 2 years, and $35 million in 3 years. After 3 years, free cash flow will grow at a rate of 5%. No new debt or preferred stock was added; the investment was financed by equity from the owners. Assume the WACC is unchanged at 11% and that there are still 10 million shares of stock outstanding. (1) What is the company's horizon value (i.e., its value of operations at Year 3)? What is its current value of operations (i.e., at Time 0)? (2) What is its estimated intrinsic value of equity on a price-per-share basis?
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
Consider the many moments of joy in the movie. Why include them? What risky acts of courage do Katherine, Mary and Dorothy take? How are they rewarded? The film shows the strong relationships that...
-
Explain the difference between time-based and output-based compensation plans.
-
The composite spring consists of two close- coiled helical springs connected in series. Each spring has 14 coils at a mean diameter of 20 mm. The stiffness of composite spring is 800 N/m. If the wire...
-
How are interest rates and the rate of return stated?
-
Deacon Company is a merchandising company that is preparing a budget for the three-month period ended June 30. The following information is available: Deacon Company Balance Sheet March 31 Assets...
-
Measures performance of business processes Track what courses employees take and what they have achieved Should be SMART Source of demographics for employee studies. Must provide confidentiality to...
-
Premier Co. acquired a machine on June 30, 20x1 and gave the seller a $20,000 cash down payment and a two year, $180,000, non-interest bearing note calling for four, semi-annual payments of P&I in...
-
In one-way ANOVA, the effect of unequal variances can be substantial when the design is ____________________ . In Exercises 7 and 8, fill in each blank with the appropriate word or phrase.
-
In one-way ANOVA, the null hypothesis states that all the population means are __________________ . In Exercises 7 and 8, fill in each blank with the appropriate word or phrase.
-
Walt Pavlo joined MCI in the spring of 1992. At that time, MCI was a growth company in the booming long-distance telecommunications industry that had 15% of the long-distance market, with revenues of...
-
In a one-way ANOVA with four samples, the sample means were x1 = 86.8, x2 = 82.4, x3 = 85.8, and x4 = 89.1. The sample sizes were n1 = n2 = n3 = n4 = 4, and the error mean square was MSE = 1.3....
-
In January 2006, the chair of Hewlett- Packard (HP), Patricia Dunn, hired a team of independent electronic-security experts to determine the source of leaked confidential details regarding HPs...
-
What did the CPA (Coalition Prov. Authority) do wrong in Iraq? a. It held elections b. It ran the Iraqi ministry of elections c. It introduced economic shock therapy d. it failed to build enough jails
-
If 2 5 9 - k 5 8 = 2 5 8 , what is the value of k?
-
Determine the assets to revenues ratio for the commercial construction company. What insight does this give you into the companys financial operations?
-
Determine the collection periodwith and without retentionand receivable turns for the commercial construction company. What insight does this give you into the companys financial operations?
-
Determine the working capital turns for the commercial construction company. What insight does this give you into the companys financial operations?
Study smarter with the SolutionInn App