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Solution
Chapter: 14
Problem: 13
Inputs
Amount of distribution $500
Tax rate 40%
WACC 11.0%
Number of shares 1,000
FCF constant growth rate 6.0%
Actual Projected
Earnings before taxes $2,550.00 $2,709.18
Taxes $1,020.00 $1,083.67
Net income $1,530.00 $1,625.51
Net plant and equipment $13,000.00 $13,780.00 $13,780.00
J. Clark Inc. (JCI), a manufacturer and distributer of sports equipment, has grown until it has become a stable, mature company.
Now JCI is planning its first distribution to shareholders. Shown below are the most recent year's financial statements and
projections for the next year, 2017 (JCI has a fiscal year ending on June 30). JCI plans to liquidate $500 million of its short-term
securities and distribute them on July 1, 2017, the first day of the next fiscal year, but has not yet decided whether to distribute
with dividends or with stock repurchases.
a. Assume first that JCI distributes the $500 million as dividends. Fill in the missing values in the balance sheet
Total assets $18,360.00 $19,889.60 $19,389.60
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
Total 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
Check for balance:
c. Caculate JCI's projected free cash flow; the tax rate is 40%.
See below for
calculations.
6/30/2016 6/30/2017 7/1/2017
Value of operations $16,152.0 $17,121.1 $17,121.1
+ Value of nonoperating assets 200.0 640.0 140.0
Total intrinsic value of firm $16,352.0 $17,761.1 $17,261.1
− Debt 2,468.2 2,192.3 2,192.3
Intrinsic value of equity $13,883.8 $15,568.8 $15,068.8
÷ Number of shares 1,000.00 1,000.00 1,000.00
Intrinsic price per share $13.88 $15.57 $15.07
Distribute as
Dividend
f. What is the projected intrinsic stock price on 7/1/2017 if JCI distributes the cash athrough stock repurchases?
How many shares will remain outstanding after the repurchase?
7/16/2015
J. Clark Inc. (JCI), a manufacturer and distributer of sports equipment, has grown until it has become a stable, mature company.
$19,389.60
$1,060.00
$2,120.00
$0.00
$3,180.00
($900.00)
$9,065.51
$14,017.33
$19,389.60
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 to the horizon value.)
d. What is JCI's current intrinsic stock price (the price on 6/30/2016)? What is the projected intrinsic stock price for
6/30/2017?
e. What is the projected intrinsic stock price on 7/1/2017 if JCI distributes the cash as dividends?
f. What is the projected intrinsic stock price on 7/1/2017 if JCI distributes the cash athrough stock repurchases?
How many shares will remain outstanding after the repurchase?
7/1/2017
$17,121.1
140.0
$17,261.1
$2,192.3
$15,068.8
967.88
$15.57
Distribute as
Repurchase
f. What is the projected intrinsic stock price on 7/1/2017 if JCI distributes the cash athrough stock repurchases?
How many shares will remain outstanding after the repurchase?
