Kathy is a financial analyst in Bidget Corp. As part of her analysis of the annu
ID: 2748964 • Letter: K
Question
Kathy is a financial analyst in Bidget Corp. As part of her analysis 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 flow (FCF) of $123 million in its most recent fiscal year.
-The firm's cost of capital (WACC) is 13%. The firm has been growing at 5% for the past six years but is expected to grow at a constant rate of 4% in the future.
-The firm has 30.75 million shares outstanding.
-The comany has $328 million in debt and $205 million in preferred stock.
Along with the rest of the finance team Kathy has been part of board meetings and knows that the company is planning to distribute $60 million, which is invested in short-term investments, to its shareholders by buying back stock from its shareholders. Kathy also observed that, at this point, apart from the $60 million in short-term investments, the firm has no other nonoperating assets.
Using results from Kathy's calculations and observations, solve for the values in the following tables. Select the best answer provided in the selection list.
a. 6,833.33
b.1,366.67
c. 68.33
d.1,421.33
a. 888
b. 948
c. 1276
d. 1153
a. 28.88
b. 41.50
c. 30.83
d. 37.50
Number of shares repurchased
a. 1.56
b. 1.95
c. 2.54
d. 3.32
a. 888
b. 1306.67
c. 6773.33
d. 1038.67
a. 37.50
b. 30.83
c. 28.88
d. 41.50
Based on you understanding of stock repurchases, identify whether the following statement is true or false:
"The stock price of a firm increases after the firm repurchases some of its shares."
This statement is (true or false) because if the stock price changes after a firm conducts its share repurchase, then there (will or will not be) arbitrage opportunities. Thus, the price of the stock remains the same after a repurchase.
Value Value of the firm's operationsa. 6,833.33
b.1,366.67
c. 68.33
d.1,421.33
Intrinsic value of equity immediately prior to stock repurchasea. 888
b. 948
c. 1276
d. 1153
Intrinsic stock price immediately prior to the stock repurchasea. 28.88
b. 41.50
c. 30.83
d. 37.50
Explanation / Answer
True: as the number of share outstanding reduces the stock price would increase.
$ Million free cash flow 123 WACC 13% Growth rate 4% shares outstanding 30.75 Debt 328 preferred stock 205 buy back 60 milion Value of firms operations Firm Value = S Operating Free Cash Flowst k-g Where: OFCF1 = operating free cash flow k = discount rate (in this case WACC) g = expected growth rate in OFCF value of firm=(123/(13%-4%) 1366.67 Intrinsic value of equity immediately prior to stock repurchase 888.00 (1366.67-328-205+54.33) Intrinsic stock price immediately prior to the stock repurchase 28.88 (888/30.75) Number of shares repurchased 2.54 (60/28)+.4 Intrinsic value of equity immediately after the stock repurchase 888.00 Intrinsic value of equity immediately after the stock repurchase 30.83 888/(30.75-2.54)-.65Related Questions
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