Suppose you are provided with the following additional information about Motif C

Question

Suppose you are provided with the following additional information about Motif Corp. (i) The projected FCFF for the next five years are projected as follows: Year 1, 2, 3, 4, and 5 are 1300, 1500, 800, 950, and 1020 FCFF(millions) respectively. The firm’s WACC is 13%. After 5-years, the FCFF are expected to grow at 5% indefinitely. (ii) The firm has preferred stocks which pays total dividends of $2.7 million per year indefinitely. The current market yield on preferred stocks is 10%. (iii) The firm also has two loans outstanding. The total interest expense on the two debts is $10 million per year. The book or balance sheet value of the first and second debt is $30 and $70 million respectively. The first and second debt has 6 and 10 years to maturity respectively. You are also told that the yield of debt ((with similar risk) maturing in 8-10 years is 12%. (iv) From the firm’s 10K reports, the firm has operating lease expense of $25 million, $26 million, $30 million and $32.50 million for each of the next 4 years. The cost of short term financing is 5%. (v) The value of the firm’s cash and marketable securities is $45 million. Projected sales and cost of sales for the coming year are $200 million and $150 million respectively. The current inventory, account receivable and accounts payable are valued at $20 million, $16 million and $13.25 million respectively.

a) What is the value of the firm?

b) What is the market value of the preferred stocks?

c) What is the market value of the loans?

d) What is the market value of the operating leases?

e) What is the firm’s minimum cash balance to sustain operations and the excess cash balance?

f) What is the value of the firm to common equity investors (market value of equity)?

g) If the firm has 250 million common stocks, what price would you pay for each stock?

Explanation / Answer

Part - A

Value of Fim

year Cashflow pvf @13% DCF
1 1300 0.885 1150.5
2 1500 0.7831 1174.65
3 800 0.6931 554.48
4 950 0.6133 582.635
5 1020 0.5428 553.656
5 21400 0.5428 11615.92
Total Value of Firm 15631.84

FCFF6 = FCFF5(1+G)/KO-G

=1020(1.05)/0.13-.05

=21400

PART - B

Prefered Stock

= Preference Dividend /yield on preference Stock

=2.7 million /0.10

=27 million $

Part - C

Loan

Loan 1

Total value = 60.49(43.55+16.94)

Loan -s

Total value Loan = 79.04 Million

Yield of Debt Loan 1 = interest + RV-SV/n

------------------------

RV+SV/2

=10+(61.8-30/8)

-----------------

61.8+30/2

=30.45%

Yield of Loan 2 = 10+(79.04-70/10)

--------------------

79.04+70/2

=14.63%

Part - D

Lease

Value of Lease payments = 100.04

PART - E

Cash balances

Marketable Securities =45 million

Profit (200 -150) =50 million

Increases in working Capital =22.75 million

(20+16-13.25)

Cash Balances 117.75

PART -E

VALUE OF EQUITY

= FCFF-COST OF DEBT - PREFERNCE STOCK

=15361.85-60.49-79.04-27

=15,195.32 Million

PART -F

Value of Equity shares = Value of equity/Number of Common Stock

=15195.32/250

=60.78 $

particulars Years cashflow Pvf @12% DCF Interest 1-6 10 miiiion 4.3553 43.55 Maturity 6 30 million 0.5645 16.94

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