MBA Finance
jaikrishna
Ch14ToolKit.xlsxChapter
| Tool Kit | Chapter 14 | 11/21/18 | ||||||||
| Distributions to Shareholders: Dividends and Repurchases | ||||||||||
| 14-2 Procedures for Cash Distributions | ||||||||||
| Declaration date: | Thursday, November 21, 2019 | |||||||||
| Dividend goes with stock: | Tuesday, December 17, 2019 | |||||||||
| Ex-dividend date: | Wednesday, December 18, 2019 | |||||||||
| Thursday, December 19, 2019 | ||||||||||
| Holder-of-record date: | Friday, December 20, 2019 | |||||||||
| Payment date: | Friday, January 10, 2020 | |||||||||
| 14-7 Setting the Target Distribution Level: The Residual Distribution Model | ||||||||||
| The optimal distribution ratio for a firm is a function of four factors. (1) Investors' preferences for dividends versus capital gains. (2) The firm's investment opportunities. (3) Its target capital structure. And (4), the availability and cost of external capital. | ||||||||||
| The last three elements can be combined into the residual distribution model. Within the residual model, firms must determine the optimal capital budget, determine the amount of equity needed to fund the capital budget (based upon the target capital structure), use reinvested earnings to meet equity requirements whenever possible, and make distributions to shareholders only if more earnings are available than are needed for dividends. The residual model can be expressed as: | ||||||||||
| Distributions = | Net Income - [(Target equity ratio) * (Total capital budget)] | |||||||||
| Consider a firm whose net income for the current year is $100 million, their target equity ratio is 60%, and the expected capital budget is $50 million. What are its distributions to be made to shareholders, according to the residual model? | ||||||||||
| Net Income | $100 | |||||||||
| Target equity ratio | 60% | |||||||||
| Total capital budget | $50 | |||||||||
| Distributions = | Net Income - [(Target equity ratio) * (Total capital budget)] | |||||||||
| = | $100 | - | 60% | * | $50 | |||||
| = | $70 | |||||||||
| Distribution = | 70.0% | |||||||||
| What if the expected capital budget rose to $166.67 million? | ||||||||||
| Total capital budget | $166.67 | |||||||||
| Distributions = | = | Net Income - [(Target equity ratio) * (Total capital budget)] | ||||||||
| = | $100 | - | 60% | * | $167 | |||||
| = | $0 | |||||||||
| Distribution = | 0.0% | |||||||||
| The firm could not have a negative dividend, so a negative distribution must be a stock issue rather than a stock repurchase. Under the residual policy, if investment opportunities exceed net income, the firm should pay zero dividends and issue stock (or else increase its debt ratio to fund the investment opportunities). | ||||||||||
| T&W's Distribution Ratio | ||||||||||
| Net income = | $60 | |||||||||
| Target equity ratio (ws) = | 60% | |||||||||
| Poor | Average | Good | ||||||||
| Capital budget | $40 | $70 | $150 | |||||||
| Required equity (ws X Capital budget) | $24 | $42 | $90 | |||||||
| Net income | $60 | $60 | $60 | |||||||
| Required equity (ws X Capital budget) | $24 | $42 | $90 | |||||||
| Distributions paid (NI – Required equity) | $36 | $18 | −$30 | Note: a negative distribution means T&W would pay no dividends but would issue stock. | ||||||
| Distribution ratio (Dividend/NI) | 60% | 30% | 0% | |||||||
| 14-9 A Tale of Two Cash Distributions: Dividends versus Stock Repurchases | ||||||||||
| Figure 14-1 | ||||||||||
| Projecting Benson Conglomerate's Financial Statements: Distributions as Dividends (Millions of Dollars) | ||||||||||
| 1. Inputs | Actual | Projected | ||||||||
| 12/31/19 | 2020 | 2021 | 2022 | 2023 | ||||||
| Sales growth rate | 5% | 5% | 5% | 5% | ||||||
| Costs / Sales | 75.00% | 75.00% | 75.00% | 75.00% | 75.00% | |||||
| Depreciation / Net PPE | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | |||||
| Cash / Sales | 1.00% | 1.00% | 1.00% | 1.00% | 1.00% | |||||
| Acct. rec. + Inv. / Sales | 27.00% | 27.00% | 27.00% | 27.00% | 27.00% | |||||
| Net PPE / Sales | 85.00% | 85.00% | 85.00% | 85.00% | 85.00% | |||||
| Acct. pay. + Accr. / Sales | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | |||||
| Tax rate | 25% | 25% | 25% | 25% | 25% | |||||
| 2. Income Statement | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | 12/31/2023 | |||||
| Net Sales | $8,000.0 | $8,400.0 | $8,820.0 | $9,261.0 | $9,724.1 | |||||
| Costs (except depr.) | 6,000.0 | 6,300.0 | 6,615.0 | 6,945.8 | 7,293.0 | |||||
| Depreciation | 680.0 | 714.0 | 749.7 | 787.2 | 826.5 | |||||
| EBIT | $1,320.0 | $1,386.0 | $1,455.3 | $1,528.1 | $1,604.5 | |||||
| Interest expensea | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||||
| Pre-tax earnings | $1,320.0 | $1,386.0 | $1,455.3 | $1,528.1 | $1,604.5 | |||||
| Taxes | 330.0 | 346.5 | 363.8 | 382.0 | 401.1 | |||||
| Net income | $990.0 | $1,039.5 | $1,091.5 | $1,146.0 | $1,203.4 | |||||
| Regular dividends | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | |||||
| Special dividends | $627.5 | $658.9 | $691.8 | $726.4 | ||||||
| Addition to RE | $412.0 | $432.6 | $454.2 | $476.9 | ||||||
| 3. Balance Sheets | 12/31/19 | 2020 | 2021 | 2022 | 2023 | |||||
| Assets | 12/30 | 12/31 | 12/30 | 12/31 | 12/30 | 12/31 | 12/30 | 12/31 | ||
| Cash | $80.0 | $84.0 | $84.0 | $88.2 | $88.2 | $92.6 | $92.6 | $97.2 | $97.2 | |
| Short-term investmentsb | 0.0 | 627.5 | 0.0 | 658.9 | 0.0 | 691.8 | 0.0 | 726.4 | 0.0 | |
| Acct. rec. + Inv. | 2,160.0 | 2,268.0 | 2,268.0 | 2,381.4 | 2,381.4 | 2,500.5 | 2,500.5 | 2,625.5 | 2,625.5 | |
| Total current assets | $2,240.0 | $2,979.5 | $2,352.0 | $3,128.5 | $2,469.6 | $3,284.9 | $2,593.1 | $3,449.1 | $2,722.7 | |
| Net plant and equipment | 6,800.0 | 7,140.0 | 7,140.0 | 7,497.0 | 7,497.0 | 7,871.9 | 7,871.9 | 8,265.4 | 8,265.4 | |
| Total assets | $9,040.0 | $10,119.5 | $9,492.0 | $10,625.5 | $9,966.6 | $11,156.7 | $10,464.9 | $11,714.6 | $10,988.2 | |
| Liabilities & Equity | ||||||||||
| Acct. pay. + Accr. | $800.0 | $840.0 | $840.0 | $882.0 | $882.0 | $926.1 | $926.1 | $972.4 | $972.4 | |
| Line of credit | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Total current liabilities | $800.0 | $840.0 | $840.0 | $882.0 | $882.0 | $926.1 | $926.1 | $972.4 | $972.4 | |
| Long-term debt | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Total liabilities | $800.0 | $840.0 | $840.0 | $882.0 | $882.0 | $926.1 | $926.1 | $972.4 | $972.4 | |
| Common stock | 2,400.0 | 2,400.0 | 2,400.0 | 2,400.0 | 2,400.0 | 2,400.0 | 2,400.0 | 2,400.0 | 2,400.0 | |
| Retained earningsc | 5,840.0 | 6,879.5 | 6,252.0 | 7,343.5 | 6,684.6 | 7,830.6 | 7,138.8 | 8,342.2 | 7,615.8 | |
| Total common equity | $8,240.0 | $9,279.5 | $8,652.0 | $9,743.5 | $9,084.6 | $10,230.6 | $9,538.8 | $10,742.2 | $10,015.8 | |
| Total liabilities & equity | $9,040.0 | $10,119.5 | $9,492.0 | $10,625.5 | $9,966.6 | $11,156.7 | $10,464.9 | $11,714.6 | $10,988.2 | |
| Check for balancing: | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | ||
| 4. Financial Deficit or Surplus | 12/30/20 | 12/31/20 | 12/30/21 | 12/31/21 | 12/30/22 | 12/31/22 | 12/30/23 | 12/31/23 | ||
| Incr. spon. liab. | $40.0 | $42.0 | $44.1 | $46.3 | ||||||
| + Incr. LT debt and stock | $0.0 | $0.0 | $0.0 | $0.0 | ||||||
| − Previous line of credit | $0.0 | $0.0 | $0.0 | $0.0 | ||||||
| + NI minus regular dividends | $1,039.5 | $1,091.5 | $1,146.0 | $1,203.4 | ||||||
| Increase in financing | $1,079.5 | $1,133.5 | $1,190.1 | $1,249.7 | ||||||
| − Increase in operating assets | $452.0 | $474.6 | $498.3 | $523.2 | ||||||
| Amount of deficit or surplus financing: | $627.5 | $658.9 | $691.8 | $726.4 | ||||||
| Line of credit | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | ||
| Short-term investment | $627.5 | $0.0 | $658.9 | $0.0 | $691.8 | $0.0 | $726.4 | $0.0 | ||
| Special dividend | $0.0 | $627.5 | $0.0 | $658.9 | $0.0 | $691.8 | $0.0 | $726.4 | ||
| Source: Numbers in the figure are shown as rounded values for clarity in reporting. However, unrounded values are used for all calculations, so columns may not total exactly. | ||||||||||
| Notes: | ||||||||||
| a To simplify the example, we assume any short-term investment are held for only part of the year and earn no interest. | ||||||||||
| b If there is a financial surplus, it is shown as a short-term investment on December 30. These funds are distributed to investors on December 31, so the balance of short-term investments goes to zero on December 31. | ||||||||||
| c Because no special dividends have been paid out as of December 30, the retained earnings balance for that date is equal to the previous year's retained earnings balance plus the current year's net income less the regular dividends. When short-term investments are sold and their proceeds are used to make the special cash dividend payments on December 31, the balance of retained earnings is reduced by the amount of the total dividend payments (which is equal to the regular dividend and the reduction in short-term investments that funded the special dividend). | ||||||||||
| Figure 14-2 | ||||||||||
| Projecting Benson Conglomerate's Liabilities & Equity: Distributions as Stock Repurchases (Millions of Dollars) | ||||||||||
| Actual | Projected | |||||||||
| 12/31/19 | 2020 | 2021 | 2022 | 2023 | ||||||
| Liabilities & Equity | 12/30 | 12/31 | 12/30 | 12/31 | 12/30 | 12/31 | 12/30 | 12/31 | ||
| Acct. pay. + Accr. | $800.0 | $840.0 | $840.0 | $882.0 | $882.0 | $926.1 | $926.1 | $972.4 | $972.4 | |
| Line of credit | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Total current liabilities | $800.0 | $840.0 | $840.0 | $882.0 | $882.0 | $926.1 | $926.1 | $972.4 | $972.4 | |
| Long-term debt | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Total liabilities | $800.0 | $840.0 | $840.0 | $882.0 | $882.0 | $926.1 | $926.1 | $972.4 | $972.4 | |
| Common stock | 2,400.0 | 2,400.0 | 2,400.0 | 2,400.0 | 2,400.0 | 2,400.0 | 2,400.0 | 2,400.0 | 2,400.0 | |
| Treasury stocka | 0.0 | 0.0 | ─627.5 | ─627.5 | ─1,286.4 | ─1,286.4 | ─1,978.2 | ─1,978.2 | ─2,704.6 | |
| Retained earningsb | $5,840.0 | $6,879.5 | $6,879.5 | $7,971.0 | $7,971.0 | $9,117.0 | $9,117.0 | $10,320.4 | $10,320.4 | |
| Total common equity | $8,240.0 | $9,279.5 | $8,652.0 | $9,743.5 | $9,084.6 | $10,230.6 | $9,538.8 | $10,742.2 | $10,015.8 | |
| Total liabilities & equity | $ 9,040.0 | $10,119.5 | $ 9,492.0 | $10,625.5 | $ 9,966.6 | $11,156.7 | $ 10,464.9 | $11,714.6 | $ 10,988.2 | |
| Check for balancing: | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | ||
| Notes: | ||||||||||
| All significant digits in are used in calculations, but numbers in the Figure are rounded, so columns may not total exactly. See Figure 14-1 for income statements and assets. | ||||||||||
| aWhen distributions are made as repurchases, the treasury stock account is reduced by the dollar value of the repurchase at the time of the repurchase, which occurs when short-term investments are liquidated and used to repurchase stock. | ||||||||||
| bBecause no funds are paid out in dividends, the retained earnings balance is equal to the previous balance plus the year's net income because all net income is being retained. | ||||||||||
| Application of the Residual Distribution Model to Benson Conglomerate (Millions of Dollars) | ||||||||||
| Projected | ||||||||||
| 12/31/2020 | 12/31/2021 | 12/31/2022 | 12/31/2023 | |||||||
| Δcash | $4.0 | $4.2 | $4.4 | $4.6 | ||||||
| + Δ(Accts. rec. + Inv.) | $108.0 | $113.4 | $119.1 | $125.0 | ||||||
| + ΔNet plant & equipment | $340.0 | $357.0 | $374.8 | $393.6 | ||||||
| − Δ(Accts. pay. + Accr.). | $40.0 | $42.0 | $44.1 | $46.3 | ||||||
| Capital budgeta | $412.0 | $432.6 | $454.2 | $476.9 | ||||||
| Target equity ratio | 100% | 100% | 100% | 100% | ||||||
| Net incomeb | $1,039.5 | $1,091.5 | $1,146.0 | $1,203.4 | ||||||
| Required additional equityc | $412.0 | $432.6 | $454.2 | $476.9 | ||||||
| Residual distribution: NI − Req. equ. | $627.5 | $658.9 | $691.8 | $726.4 | ||||||
| Notes: | ||||||||||
| aSee Figure 14-1 for balance sheet projections. The capital budget is equal to the net addition to total operating capital: ΔCash + Δ(Accts. rec. Inv) + ΔNet plant & equipment − Δ(Accts. pay. + Accr.). | ||||||||||
| bSee Figure 14-1 for income statement projections. | ||||||||||
| cRequired additional equity = Capital budget x Target equity ratio. | ||||||||||
| 12.00% | ||||||||||
| Figure 14-3 | ||||||||||
| Benson Conglomerate's Value of Operations Under (Millions of Dollars) | ||||||||||
| WACC = | 11.50% | Projected | ||||||||
| 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | 12/31/2023 | ||||||
| 1. Calculation of Free Cash Flow | ||||||||||
| Operating current assetsa | $2,240.00 | $2,352.00 | $2,352.00 | $2,469.60 | $2,469.60 | $2,593.08 | $2,593.08 | $2,722.73 | $2,722.73 | |
| Operating current liabilitiesb | 800.00 | 840.00 | 840.00 | 882.00 | 882.00 | 926.10 | 926.10 | 972.41 | 972.41 | |
| NOWCc | $1,440.00 | $1,512.00 | $1,512.00 | $1,587.60 | $1,587.60 | $1,666.98 | $1,666.98 | $1,750.33 | $1,750.33 | |
| Net plant & equipment | 6,800.00 | 7,140.00 | 7,140.00 | 7,497.00 | 7,497.00 | 7,871.85 | 7,871.85 | 8,265.44 | 8,265.44 | |
| Total net operating capitald | $8,240.00 | $8,652.00 | $8,652.00 | $9,084.60 | $9,084.60 | $9,538.83 | $9,538.83 | $10,015.77 | $10,015.77 | |
| NOPATe | $990.00 | $1,039.50 | $0.00 | $1,091.48 | $0.00 | $1,146.05 | $0.00 | $1,203.35 | $0.00 | |
| Inv. in operating capitalf | 412.00 | 432.60 | 454.23 | 476.94 | ||||||
| Free cash flow (FCF)g | $627.50 | $658.88 | $691.82 | $726.41 | ||||||
| 2. Performance Measures | 12/31/19 | 12/31/20 | 12/31/99 | 12/31/21 | 12/31/99 | 12/31/22 | 12/31/99 | 12/31/23 | 12/31/99 | |
| Expected ROICh | 12.62% | 12.62% | 12.62% | 12.62% | ||||||
| Growth in FCF | na | 5.00% | 5.00% | 5.00% | ||||||
| Growth in sales | 5.00% | 5.00% | 5.00% | 5.00% | ||||||
| 3. Valuation | 12/31/19 | 12/31/20 | 12/31/99 | 12/31/21 | 12/31/99 | 12/31/22 | 12/31/99 | 12/31/23 | 12/31/99 | |
| Horizon value at 12/31/2023 (after FCF paid)i | $11,734.31 | Note: we can apply the horizon value formula before the last projected year because FCF is growing at a constant rate from the beginning. | ||||||||
| Value of operationsj | $9,653.85 | $10,136.54 | $10,643.37 | $11,175.53 | $11,734.31 | |||||
| Notes: | ||||||||||
| Numbers in the figure are shown as rounded values for clarity in reporting. However, unrounded values are used for all calculations. | ||||||||||
| aSum of cash, accounts receivable, and inventories. | ||||||||||
| bSum of accounts payable and accruals. | ||||||||||
| cNet operating working capital is equal to operating current assets minus operating current liabilities. | ||||||||||
| dSum of NOWC and net plant & equipment | ||||||||||
| eNet operating profit after taxes = (EBIT)(1−T). Notice that NOPAT is equal to net income in this example because there is no interest expense or income. | ||||||||||
| fChange in net operating capital from previous year. | ||||||||||
| gFCF = NOPAT − investment in operating capital | ||||||||||
| hExpected return on invested capital = NOPAT divided by beginning capital. | ||||||||||
| iHorizon value at 2023 is immediately after the FCF at 2023 has been paid, which makes the horizon value at 2023 the present value of all FCF from 2024 and beyond discounted back to 12/31/2023: HV2023 = [FCF2023 (1+gL)]/(WACC−gL). | ||||||||||
| jValue of operations before horizon = Vop(t) = (Vop(t + 1) + FCFt + 1)/(1+WACC). | ||||||||||
| Figure 14-4 | ||||||||||
| Benson Conglomerate's Intrinsic Stock Price for Each Method of Distribution (Millions of Dollars, Except for Per-Share Data) | ||||||||||
| Section 1. Distribute as Dividends | Projected | |||||||||
| 2020 | 2021 | 2022 | 2023 | |||||||
| 12/31/19 | 12/30 | 12/31 | 12/30 | 12/31 | 12/30 | 12/31 | 12/30 | 12/31 | ||
| Value of operations | $9,654 | $10,137 | $10,137 | $10,643 | $10,643 | $11,176 | $11,176 | $11,734 | $11,734 | |
| + Value of nonoperating assets | $0 | $628 | $0 | $659 | $0 | $692 | $0 | $726 | $0 | |
| Total intrinsic value of firm | $9,654 | $10,764 | $10,137 | $11,302 | $10,643 | $11,867 | $11,176 | $12,461 | $11,734 | |
| − Debt | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
| − Preferred stock | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
| Intrinsic value of equity | $9,654 | $10,764 | $10,137 | $11,302 | $10,643 | $11,867 | $11,176 | $12,461 | $11,734 | |
| ÷ Number of shares | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 | |
| Intrinsic price per sharea | $9.65 | $10.76 | $10.14 | $11.30 | $10.64 | $11.87 | $11.18 | $12.46 | $11.73 | |
| Dividend per share | $0.63 | $0.66 | $0.69 | $0.73 | ||||||
| Section 2. Distribute as Repurchase | 2020 | 2021 | 2022 | 2023 | ||||||
| 12/31/19 | 12/30 | 12/31 | 12/30 | 12/31 | 12/30 | 12/31 | 12/30 | 12/31 | ||
| Value of operations | $9,654 | $10,137 | $10,137 | $10,643 | $10,643 | $11,176 | $11,176 | $11,734 | $11,734 | |
| + Value of nonoperating assets | $0 | $628 | $0 | $659 | $0 | $692 | $0 | $726 | $0 | |
| Total intrinsic value of firm | $9,654 | $10,764 | $10,137 | $11,302 | $10,643 | $11,867 | $11,176 | $12,461 | $11,734 | |
| − Debt | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | ||
| − Preferred stock | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
| Intrinsic value of equity | $9,654 | $10,764 | $10,137 | $11,302 | $10,643 | $11,867 | $11,176 | $12,461 | $11,734 | |
| ÷ Number of sharesb | 1,000 | $1,000 | $942 | $942 | $887 | $887 | $835 | $835 | $786 | |
| Intrinsic price per sharea | $9.65 | $10.76 | $10.76 | $12.00 | $12.00 | $13.38 | $13.38 | $14.92 | $14.92 | |
| Notes: | ||||||||||
| Numbers in the figure are shown as rounded values for clarity in reporting. However, unrounded values are used for all calculations. | ||||||||||
| aThe projected intrinsic stock prices for four years are shown in Ch14 Tool Kit.xls. | ||||||||||
| bThe number of shares after the repurchase is: nPost = nPrior − (CashRep/PPrior). In this example, the entire amount of ST investments (i.e., the balance of nonoperating assets) is used to repurchase stock. | ||||||||||
Price per share (Dividends)
43830 44195 44196 44560 44561 44925 44926 45290 45291 9.6538461538459881 10.764038461538277 10.136538461538278 11.30224038461518 10.64336538461518 11.867352403845926 11.175533653845925 12.460720024038206 11.734310336538206 Price per share (Repurchase)Price per share (Repurchase)
43830 44195 44196 44560 44561 44925 44926 45290 45291 9.6538461538459881 10.764038461538277 10.764038461538277 12.001902884615179 12.001902884615179 13.382121716345926 13.382121716345925 14.921065713725707 14.921065713725705End of Month
Stock Price
14-7
| SECTION 14-7 | ||
| SOLUTIONS TO SELF-TEST | ||
| Hamilton Corporation has a target equity ratio of 65%. Its capital budget is $2 million. If Hamilton has net income of $1.6 million and follows a residual distribution model, how much will its distribution be? | ||
| Capital budget = | $2,000,000 | |
| Target equity ratio = | 65% | |
| Net income = | $1,600,000 | |
| Residual distribution = | $300,000 | |
14-9
| SECTION 14-9 | ||||
| SOLUTIONS TO SELF-TEST | ||||
| A firm's most recent FCF was $2.4 million; the FCF is expected to grow at a constant rate of 5%. The WACC is 14% and there are 2 million shares outstanding. The firm has $12 million in short-term investments which it plans to liquidate distribute in a stock repurchase; the firm has no other financial investments or debt. Verify that the value of operations is $28 million. Immediately prior to the repurchase, what are the intrinsic value of equity and the intrinsic stock price? How many shares will be repurchased? How many shares will remain after the repurchase? Immediately after the repurchase, what are the intrinsic value of equity and the intrinsic stock price? | ||||
| Note: All values in millions except per share data. | ||||
| FCF = | $2.4 | million | ||
| g = | 5% | |||
| WACC = | 14% | |||
| nPrior = | 2.0 | million | ||
| Short-term investments (Extra cash) = | $12 | million | ||
| Note: All values in millions except per share data. | ||||
| Prior Repurchase | After Repurchase | |||
| Value of operations | $28.0 | $28.0 | million | |
| + Value of nonoperating assets | 12.0 | 0.0 | million | |
| Total intrinsic value of firm | $40.0 | $28.0 | million | |
| − Debt | 0.0 | 0.0 | million | |
| − Preferred stock | 0.0 | 0.0 | million | |
| Intrinsic value of equity | $40.0 | $28.0 | million | |
| ÷ Number of shares | 2.0 | 1.4 | million | |
| Intrinsic stock price | $20.00 | $20.00 | ||
| # shares repurchased = | 0.6 |
14-13
| SECTION 14-13 | ||
| SOLUTIONS TO SELF-TEST | ||
| Suppose you have 1,000 common shares of Burnside Bakeries. The EPS is $6.00, the DPS is $3.00, and the stock sells for $90 per share. Burnside announces a 3-for-1 split. Immediately after the split, how many shares will you have, what will the adjusted EPS and DPS be, and what would you expect the stock price to be? | ||
| Shares | 1,000 | |
| EPS | $6 | |
| DPS | $3 | |
| Stock price | $90 | |
| Split factor (n-for-1) | 3 | |
| Shares | 3,000 | |
| EPS | $2.00 | |
| DPS | $1.00 | |
| Price | $30.00 | |
