Wenyu Li MINI CASE
Wenyu Li
BUS 581
03/01/2015
Chapter 7 MINI CASE
Your employer, a mid-sized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporary heavy workloads. Your employer is also considering the purchase of a Biggerstaff & Biggerstaff (B&B), a privately held company owned by two brothers, each with 5 million shares of stock. B&B currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&B’s financial statements report marketable securities of $100 million, debt of $200 million, and preferred stock of $50 million. B&B’s WACC is 11%. Answer the following questions.
a. Describe briefly the legal rights and privileges of common stockholders.
1. Right to share income and assets
2. Control of the firm
3.Preemptive right
4. Voting right. Common stockholders can attend at annual general meeting to cast vote or use a proxy
b. (1) Write out a formula that can be used to value any stock, regardless of its dividend pattern.
(2) What is a constant growth stock? How are constant growth stocks valued?
A constant growth stock is a stock whose dividends are expected to grow at a constant rate in the foreseeable future. This condition fits many established firms, which tend to grow over the long run at the same rate as the economy, fairly well. The value of a constant growth stock can be determined using the following equation:
(3) What happens if a company has a constant g that exceeds its rs? Will many stocks have expected g > rs in the short run (i.e., for the next few years)? In the long run (i.e., forever)?
If g > rs, the stock price is negative which does not make sense. The model simply cannot be used unless (1) rs > g, (2) g is expected to be constant, and (3) g can reasonably be expected to continue indefinitely. Stocks may have periods
BUS 581
03/01/2015
Chapter 7 MINI CASE
Your employer, a mid-sized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporary heavy workloads. Your employer is also considering the purchase of a Biggerstaff & Biggerstaff (B&B), a privately held company owned by two brothers, each with 5 million shares of stock. B&B currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&B’s financial statements report marketable securities of $100 million, debt of $200 million, and preferred stock of $50 million. B&B’s WACC is 11%. Answer the following questions.
a. Describe briefly the legal rights and privileges of common stockholders.
1. Right to share income and assets
2. Control of the firm
3.Preemptive right
4. Voting right. Common stockholders can attend at annual general meeting to cast vote or use a proxy
b. (1) Write out a formula that can be used to value any stock, regardless of its dividend pattern.
(2) What is a constant growth stock? How are constant growth stocks valued?
A constant growth stock is a stock whose dividends are expected to grow at a constant rate in the foreseeable future. This condition fits many established firms, which tend to grow over the long run at the same rate as the economy, fairly well. The value of a constant growth stock can be determined using the following equation:
(3) What happens if a company has a constant g that exceeds its rs? Will many stocks have expected g > rs in the short run (i.e., for the next few years)? In the long run (i.e., forever)?
If g > rs, the stock price is negative which does not make sense. The model simply cannot be used unless (1) rs > g, (2) g is expected to be constant, and (3) g can reasonably be expected to continue indefinitely. Stocks may have periods