Elle is a financial analyst in BTR Warehousing. 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 $45 million in its most recent fiscal year. • The firm’s cost of capital (WACC) is 14%. The firm has been growing at 10% for the past six years but is expected to grow at a constant rate of 8% in the future. • The firm has 11.25 million shares outstanding. • The company has $120 million in debt and $75 million in preferred stock. Along with the rest of the finance team, Elle has been part of board meetings and knows that the company is planning to distribute $120 million, which is invested in short-term investments, to its shareholders by buying back stock from its shareholders. Elle also observed that, at this point, apart from the $120 million in short-term investments, the firm has no other nonoperating assets. Using results from Elle’s calculations and observations, solve for the values in the following tables. Select the best answer provided in the selection list. Value per share Value of the firm’s operations Intrinsic value of equity immediately prior to stock repurchase Intrinsic stock price immediately prior to the stock repurchase Number of shares repurchased Intrinsic value of equity immediately after the stock repurchase Intrinsic stock price immediately after the stock repurchase
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Calculate the value per share: Value per share = Intrinsic value of equity / Number of shares outstanding To calculate the intrinsic value of equity, we need to use the free cash flow (FCF) and the firm's cost of capital (WACC). Intrinsic value of equity = FCF / Show more…
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P16.5 (LO 2, 3), AP: Here is Frederick Company's portfolio of long-term stock investments on December 31, 2021, the end of its first year of operations. Cost 1,000 shares of Willhite Corporation common stock: $52,000 1,400 shares of Hutcherson Corporation common stock: $84,000 1,200 shares of Downing Corporation preferred stock: $33,600 On December 31, the total cost of the portfolio equaled the total fair value. Frederick had the following transactions related to the securities during 2022. Jan. 20: Sold all 1,000 shares of Willhite Corporation common stock at $55 per share. Jan. 28: Purchased 400 shares of $10 par value common stock of Liggett Corporation at $78 per share. Jan. 30: Received a cash dividend of $1.15 per share on Hutcherson Corp. common stock. Feb. 8: Received cash dividends of $0.40 per share on Downing Corp. preferred stock. Feb. 18: Sold all 1,200 shares of Downing Corp. preferred stock at $27 per share. July 30: Received a cash dividend of $1.00 per share on Hutcherson Corp. common stock. Sept. 6: Purchased an additional 900 shares of $10 par value common stock of Liggett Corporation at $82 per share. Dec. 1: Received a cash dividend of $1.50 per share on Liggett Corporation's common stock. On December 31, 2022, the fair values of the securities were: Hutcherson Corporation common stock: $64 per share Liggett Corporation common stock: $72 per share Instructions: 1. Prepare journal entries to record the transactions. 2. Post to the investment account. (Use a T-account.) 3. Prepare the adjusting entry on December 31, 2022, to report the portfolio at fair value. 4. Show the balance sheet presentation on December 31, 2022, for the investment-related accounts. 5. Prepare a balance sheet.
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You are a new intern at Wingate Weather Corp (WWC), a Canadian manufacturer of weather stations. The company is considering the purchase of new equipment and needs your help to calculate the weighted average cost of capital. You have been provided with the firm's most recent financial statements as well as the following additional information: Wingate Weather Corporation ($millions) Assets Cash & short-term securities $15 Bonds, coupon = 9%, paid semi-annually (maturity 15 years, $1,000 face value) $10 Accounts Receivable $9 Preferred Stock (Par value $20 per share) $2 Inventories $6 Common Stock (1,000,000 shares outstanding) $10 Plant & Equipment $35 Retained Earnings $43 Total $65 Liabilities & Shareholders' Equity Total $65 You have gathered the following information for the company: Debt: The bonds are currently selling at a quoted price of 102.4 and mature in 15 years. New debt would be issued at par ($1,000) with flotation costs of 2.5%. Preferred Shares: The existing preferred shares are currently selling for $25 per share. WWC can sell new $100 par value preferred shares with a 12% annual dividend. The market price is expected to be $95 per share. Flotation costs for new preferred shares are estimated at 3%. Common Equity: WWC's common shares currently sell for $18 per share. WWC does not have enough cash on hand to finance the equity portion of the projects. WWC has a tax rate of 40% and a beta of 1.79. You have observed the following from the market: an 8% market risk premium and a 2% risk-free rate. Flotation costs for new common shares are estimated at 5%. The planned equipment purchases have a total capital cost of $480,000 with shipping costs of $20,000. The present value of the after-tax operating cash flows will be $389,044, the present value of the CCA tax shield will be $107,776, and the present value of ending (terminal) cash flows will be $19,998. a) Calculate the cost of debt. b) Calculate the cost of preferred stock. c) Calculate the cost of common equity.
Early in the year, Debra Deal and several friends organized a corporation called Markup, Inc. The corporation was authorized to issue 100,000 shares of $100 par value, 5 percent cumulative preferred stock and 100,000 shares of $1 par value common stock. The following transactions (among others) occurred during the year: Jan. 7: Issued for cash 30,000 shares of common stock at $10 per share. The shares were issued to Deal and four other investors. Jan. 12: Issued an additional 1,000 shares of common stock to Deal in exchange for her services in organizing the corporation. The stockholders agreed that these services were worth $12,000. Jan. 18: Issued 4,000 shares of preferred stock for cash of $400,000. July 5: Acquired land as a building site in exchange for 10,000 shares of common stock. In view of the appraised value of the land and the progress of the company, the directors agreed that the common stock was to be valued for purposes of this transaction at $12 per share. Nov. 25: The first annual dividend of $5 per share was declared on the preferred stock to be paid December 11. Dec. 11: Paid the cash dividend declared on November 25. Dec. 31: After the revenue and expenses were closed into the Income Summary account, that amount indicated a net income of $810,000.
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