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.
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?
(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)?
c. Assume that Temp Force has a beta coefficient of 1.2, that the
risk-free rate (the yield on T-bonds) is 7.0%, and that the market
risk premium is 5%. What is the required rate of return on the
firm‘s stock?
d. Assume that Temp Force is a constant growth company whose
last dividend (D0, which was paid yesterday) was $2.00 and
whose dividend is expected to grow indefinitely at a 6% rate.
(1) What is the firm‘s current estimated intrinsic stock price?
(2) What is the stock‘s expected value 1 year from now?
(3) What are the expected dividend yield, the expected capital
gains yield, and the expected total return during the first year?