Daniele is a financial analyst in RTE Telecom Inc. As part of her analynis of th
ID: 1170053 • Letter: D
Question
Daniele is a financial analyst in RTE Telecom Inc. As part of her analynis of the annual distribution policy and its impact on the firm's value, she makes the following calculations and observations: The company generated a free cash fow (FOP) of $48 mllion in its most recent fiscal year * The firrn's cost of capital (WACC) is14% The firm has been growing at 10% forthe past six years but is expected to grow at a constant rate of 8% in the future. The Fm has 12.00 million shares outstanding. "he company has si128 million in debt and sso million in prefemed stock Along with the rest of the finance toam, Denislile has been part of bord mavtings and knows thot the company is planning to distribute $120 million, which is invested in short-tberm investments, to its sharehoiders by buying back stock from its sharholders. Dankele aso observed that at this point, ape?trom the $120 million in short-term investments, the firm' has no other nonoperating msets using results from Denaelle's calculations and observations, soV?for the waiu es in the foils ing tables select the best answer provided in the selection N Value Value value of the firm's operation tntrinsk value of equity immedintal prior to stock repurchase Intrinsic stock price immediatels pror to the stock repurehase quity mediately her stol repurchase nbiss seck price mmediatety the stockurchase Based on your undenstonoing of Mock purchscs den MiNt thefodg stament is true on alse when mít mu i e distributions n the frm of dividen- thet: ttiet? 4% e al y thei a uer suitends perahe. (OPS) detrt uted but the this statemerc isExplanation / Answer
Value of firm's operation = FCF(1+g)/WACC-g = 48(1+0.08)/0.14-0.08 = $864 million
Intrinsic value of equity immediately prior to stock repurchase = Value of firm's operation + Value of non operating assets - debt - preferred stock
= 864+120-128-80 = $776 million
Intrinsic stock price immediately prior to stock repurchase = $776 million/12 million = $64.67
No. of shares repurchased = $120 million / $64.67 = 1.86 million shares
Intrinsic value of equity immediately after stock repurchase = $776 million - $120 million = $656 million
Intrinsic stock price immediately after stock repurchase = $656 million / 12-1.86 million = $64.69
The below statement is true.
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