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Solution

Chapter: 14
Problem: 13

J. Clark Inc. (JCI), a manufacturer and distributer of sports equipment, has grown until it has become a stable, mature
planning its first distribution to shareholders. Shown below are the most recent year's financial statements and projec
2017 (JCI has a fiscal year ending on June 30). JCI plans to liquidate $500 million of its short-term securities and dist
2017, the first day of the next fiscal year, but has not yet decided whether to distribute with dividends or with stock re

Inputs
Amount of distribution $500
Tax rate 40%
WACC 11.0%
Number of shares 1,000
FCF constant growth rate 6.0%

Actual Projected
Income Statement (Millions of Dollars) 6/30/2016 6/30/2017
Net Sales $20,000.00 $21,200.00
Costs (except depreciation) $16,000.00 $16,960.00
Depreciation $1,300.00 $1,378.00
Earning before int. & tax $2,700.00 $2,862.00
Interest expense $150.00 $152.82
Earnings before taxes $2,550.00 $2,709.18
Taxes $1,020.00 $1,083.67
Net income $1,530.00 $1,625.51

a. Assume first that JCI distributes the $500 million as dividends. Fill in the missing values in the balance sheet colu
July 1, 2017, that is labeled "Distribute as Dividends." (Hint: Be sure that the balance sheets balance after you fill in th
items. Also, assume JCI did not have to establish an account for dividends payable prior to the distribution.)

See below for


calculations.

b. Now assume that JCI distributes the $500 million through stock repurchases. Fill in the missing values in the bala
column for July 1, 2017, that is labeled "Distribute as Repurchase." (Hint: Be sure that the balance sheets balance aft
in the missing items.)

Projected: Prior Distribute as


Balance Sheets (Millions of Dollars) Actual to Distribution Dividend
Assets 6/30/2016 6/30/2017 7/1/2017
Cash $160.00 $169.60 $169.60
Short-term investments $200.00 $640.00
Accounts receivable $2,000.00 $2,120.00 $2,120.00
Inventories $3,000.00 $3,180.00 $3,180.00
al current assets $5,360.00 $6,109.60 $5,469.60
Net plant and equipment $13,000.00 $13,780.00 $13,780.00
Total assets $18,360.00 $19,889.60 $19,249.60
Liabilities & Equity
Accounts payable $1,000.00 $1,060.00 $1,060.00
Accruals $2,000.00 $2,120.00 $2,120.00
Short-term debt $400.00 $0.00 $0.00

current liabilities $3,400.00 $3,180.00 $3,180.00


Long-term debt $2,068.18 $2,192.27 $2,192.27
Total liabilities $5,468.18 $5,372.27 $5,372.27
Common stock $5,851.82 $5,851.82 $5,851.82
Treasury stock ($400.00) ($400.00)
Retained earnings $7,440.00 $9,065.51
l common equity $12,891.82 $14,517.33 $5,851.82
iabilities & equity $18,360.00 $19,889.60 $11,224.09
NOT
eck for balance: BALANCED!

c. Caculate JCI's projected free cash flow; the tax rate is 40%.

Projected

Calculation of
Free Cash Flow 6/30/2016 6/30/2017
Operating current assets $5,160.00
Operating current liabilities 3,000.00
Net operating working capital $2,160.00
Net plant & equipment 13,000.00
Total net operating capital $15,160.00
Net operating profit after taxes $1,620.00
Inv. in operating capital
Free cash flow (FCF)

c. Caculate JCI's horizon value for 6/30/2017. FCF is expected to grow at a constant rate of 6% and JCI's WACC is 11
Calculate JCI's value of operations for 6/30/2016 and 6/30/2017. (Hint: JCI's value of operations on 6/30/2017 is equal t
horizon value.)

Valuation 6/30/2016 6/30/2017


Horizon value
Value of operations

d. What is JCI's current intrinsic stock price (the price on 6/30/2016)? What is the projected intrinsic stock price for 6
See below for
calculations.

e. What is the projected intrinsic stock price on 7/1/2017 if JCI distributes the cash as dividends?

See below for


calculations.

f. What is the projected intrinsic stock price on 7/1/2017 if JCI distributes the cash athrough stock repurchases? How
shares will remain outstanding after the repurchase?

See below for


calculations.

Distribute as
Dividend
6/30/2016 6/30/2017 7/1/2017
Value of operations
+ Value of nonoperating assets
Total intrinsic value of firm
− Debt
Intrinsic value of equity
÷ Number of shares
Intrinsic price per share
7/16/2015

as become a stable, mature company. Now JCI is


ancial statements and projections for the next year,
ort-term securities and distribute them on July 1,
h dividends or with stock repurchases.

es in the balance sheet column for


ts balance after you fill in the missing
o the distribution.)

e missing values in the balance sheet


balance sheets balance after you fill

Distribute as
Repurchase
7/2/2017
$169.60

$2,120.00
$3,180.00
$5,469.60
$13,780.00
$19,249.60

$1,060.00
$2,120.00
$0.00

$3,180.00
$2,192.27
$5,372.27
$5,851.82

$5,851.82
$11,224.09
NOT
BALANCED!

of 6% and JCI's WACC is 11%.


tions on 6/30/2017 is equal to the

ed intrinsic stock price for 6/30/2017?


idends?

gh stock repurchases? How many

Distribute as
Repurchase
7/1/2017

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