a. Bailey Breweries most recently reported free cash flow was $250 million and t
ID: 2805259 • Letter: A
Question
a. Bailey Breweries most recently reported free cash flow was $250 million and the free cash ow grow at a constant rate of 5% million in debt outstanding, and $200 million in preferred stock. T million shares of common stock outstanding. a. What is the intrinsic value per share of common stock? (3 ure. Bailey has $600 million in liquid, short-term investments, $800 he firm's WACC is 10% and there are 150 in the fut points) Bailey' to common shareholders. smanagement wishes to liquidate $300 million of the short-term investments and distribute the proceeds eainey distributes the $300 million as a dividend, what is the intrinsic value per share of common stock immediately after the dividend is paid? (3 points) If Bailey distributes how many shares will be repurchased? What is the intrinsic value per share of common stock immediately after the repurchase is completed? (4 points) the $300 million in an open market share repurchase completed at the intrinsic value, c.Explanation / Answer
(a) Preferred Stock Amount = $ 200 million, Debt Outstanding = $ 800 million, Short Term Liquid Investments = $ 600 million
Number of Common Stock Outstanding = 150 million and WACC =10%
Free Cash Flow at Present (Year 0 end) = $ 250 million expected to grow at 5% annually for perpetuity.
Free Cash Flow in Year 1 = 250 x 1.05 = $262.5 million
Since the cash flows are expected to grow at a constant rate to perpetuity, the constant growth perpetuity formula needs to be used to calculate the total PV(Present Value) of the perpetual cash flows. This total PV is the intrinsic value/enterprise value of the firm.
Therefore, PV (of all perpetual cash flows) = [ Free Cash Flow (in Year 1) / (WACC - Annual Constant Growth Rate)] = [262.5 / (0.1 - 0.05)] = $ 5250 million
Therefore, intrinsic value of the firm (not the common stock) = PV of the perpetual cash flows = $ 5250 million
Intrinsic Firm Value Plus Short Term Liquid Investments Less Preferred Stock Less Debt Outstanding = 5250 + 600 - 200 - 800 = $ 4850 million
The value calculated by subracting the debt outstanding, preferred stock and adding the short term liquid investments from and to the intrinsic firm value, is the value left for common stock holders. (Common stock holders gain right to company value only after liquid investments are added, outstanding debt obligation payments and preferred shareholders are paid).
Therefore, Intrinsic Common Stockholder Value = $ 4850 million and Number of common stock outstanding = 150 million
Therefore, intrinsic value per share of common stock = Intrinsic Value of Common Stock / Number of Common Stock Outstanding = 4850 / 150 = $32.33
(b) If $300 million worth of short term liquidity is paid out in the form of dividends then short term liquid investment remaining would be the other $300 million. Essentially this means that the intrinsic firm value is reduced by the debt obligation of $800 million, preferred stock worth $200 million and remaining short term liquid investment worth $300 million is added to obtain the intrinsic common stock value.
Therefore, intrinsic common stock value = 5250 - 800 - 200 + 300 = $4550 million
Therefore, new intrinsic common stock value per share = 4550 / 150 = $ 30.33
(c) If $300 million is distributed in lieu of share repurchase and all repurchases are made at the intrinsic value of $32.33, the number of common share bought = Repurchase Payout / Intrinsic Value per share = 300 / 32.33 = 9.28 million
Therefore, number of shares outstanding = Initial number of common stock outstanding Less Repurchase Amount = 150 -9.28 = 140.72 million
If $300 million is distributed as repurchase proceeds the increment in intrinsic firm value caused by short term liquid investments becomes half. Therefore, intrinsic common stock value = $4550 million.
Therefore, intrinsic common stock value post repurchase = Intrinsic Common Stock Value / Remaining number of common stock = 4550 / 140.72 = $ 32.33
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