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Benchmark – Mini Case 4 1

Benchmark – Mini Case 4

a) Legal Rights and Privileges of Common Stockholders

Benchmark – Mini Case 4 2

Shaner, (2017) states that common stockholders are the real owners of the company,

and as such they have certain rights and privileges. Common stockholders have the right to

share company's earnings equally on a per-share basis. In the event of liquidation, they have

claim on assets that remain after meeting the obligation to accrued taxes, salary and wages,

creditors including bondholders and preferred stockholders. Common stockholders also control

the firm through their right to elect the company's board of directors, that appoints

management. They possess preemptive right which is a privilege for buying a specified number

of shares of the company's stocks before the stocks are offered to outsiders for sale. They also

can attend annual general meetings to cast vote or use a proxy which is a legal document given

to one person for the authority to cast vote and represent on behalf of others. Each share of

stock has one vote for each director at the general meeting.

b) Free Cash Flow (FCF)

Free cash Flow is the cash a company produces through its operations, less the cost of

expenditures on working capital or assets and dividends during the same period, its cash left

after a company pays for its operating expenses and capital expenditures. It’s an important

indicator of how efficient a company is at generating cash and paying its expenditures.

Investors use free cash flow to measure whether a company will have enough cash, after

funding operations and capital expenditures, to pay investors through dividends and share buy-

backs (Gul, 2001).

Weighted Average Cost of Capital

Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in

which each category of capital that is common shares, preferred shares, bonds, and any other

long-term debt, is proportionately weighted by its percentage of total capital and they are added

together. The purpose of WACC is to determine the cost of each part of the company’s capital

structure based on the proportion of equity, debt, and preferred stock it has (Miller, 2009).

Benchmark – Mini Case 4 3

Free Cash Flow Valuation Model

Free cash flow valuation method is based on the operating cash flows coming in after

deducting the capital expenditures, which are the costs of maintaining the asset base. This cash

flow is taken before the interest payments to debt holders in order to value the total firm.

Example, factoring in equity, would provide the growing value to equity holders. Discounting

any cash flows requires a discount rate, and in this case, it is the cost of financing projects at

the firm, hence the weighted average cost of capital (WACC) is used for this discount rate. The

operating free cash flow is then discounted at this cost of capital rate using three potential

growth scenarios which are, no growth, constant growth, and changing growth rate (Gul, 2001).

c) Company Value and Claim Value Pie Charts

d) Formula for The Present Value of Expected Free Cash Flows, Discounted at WACC

OFCF=EBIT×(1−T)+D−CAPEX−D×wc−D×a

Value of the firm=OFCF1÷(k−g)

where:

EBIT=earnings before interest and taxes wc=working capita

T=tax rate la=any other assets

D=depreciation g=expected growth rate in OFCF

OFCF1=operating free cash flow k=discount rate, in this case WACC

References

Company Value

Shareholders

Net Debts

Claims on a company value

Debt Holders Preffered Stockholders

Common Shareholders

Benchmark – Mini Case 4 4

Gul, F. A., & Tsui, J. S. (2001). Free cash flow, debt monitoring, and audit pricing: Further

evidence on the role of director equity ownership. Auditing: A Journal of Practice &

Theory, 20(2), 71-84.

Miller, R. A. (2009). The weighted average cost of capital is not quite right. The Quarterly

Review of Economics and Finance, 49(1), 128-138.

Shaner, M. W. (2017). Confronting New Market Realities: Implications for Stockholders

Rights to Vote, Sell, and Sue. Okla. L. Rev., 70, 1.

Course Code Class Code Assignment Title Total Points

FIN-650 FIN-650-O500 Benchmark - Mini Case 4 30.0

Criteria Percentage Unsatisfactory (0.00%) Less than Satisfactory (74.00%) Satisfactory (79.00%) Good (87.00%) Excellent (100.00%) Comments Points Earned

Content 100.0%

Question A 15.0% Answer to question A is not included. Answer to question A is incomplete or incorrect.

Answer to question A is included but lacks explanation and

relevant supporting details.

Answer to question A is complete and includes relevant

supporting details.

Answer to question A is extremely thorough and supported

with substantial relevant details. 4.50/4.50

Question B 15.0% Answer to question B is not included. Answer to question B is incomplete or incorrect.

Answer to question B is included but lacks explanation and

relevant supporting details.

Answer to question B is complete and includes relevant

supporting details.

Answer to question B is extremely thorough and supported

with substantial relevant details. 3.92/4.50

Question C 15.0% Answer to question C is not included. Answer to question C is incomplete or incorrect.

Answer to question C is included but lacks explanation and

relevant supporting details.

Answer to question C is complete and includes relevant

supporting details.

Answer to question C is extremely thorough and supported

with substantial relevant details. 4.50/4.50

Question D 15.0% Answer to question D is not included. Answer to question D is incomplete or incorrect.

Answer to question D is included but lacks explanation and

relevant supporting details.

Answer to question D is complete and includes relevant

supporting details.

Answer to question D is extremely thorough and supported

with substantial relevant details. 3.56/4.50

Ethical Issues and Standards (C4.2; C10.2) 30.0%