Solution 12/8/2012
Chapter: 14
Problem: 13
Inputs
Amount of distribution $500
Actual Projected
Income Statement (Millions of Dollars) 6/30/2013 6/30/2014
Net Sales $20,000.00 $21,200.00
Costs (except depreciation) $16,000.00 $16,960.00
Balance Sheets (Millions of Dollars) Actual
Assets 6/30/2013 6/30/2014 7/1/2014 7/2/2014
Cash $160.00 $169.60 $169.60 $169.60
Short-term investments $200.00 $640.00 $140.00 $140.00
Accounts receivable $2,000.00 $2,120.00 $2,120.00 $2,120.00
Inventories $3,000.00 $3,180.00 $3,180.00 $3,180.00
Total current assets
$5,360.00 $6,109.60 $5,609.60 $5,609.60
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, 2014 (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, 2014, the first day of the next fiscal year, but has not yet decided whether to distribute with
dividends or with stock repurchases.
Projected:
Prior to
Distribution
Distribute as
Dividend
Distribute as
Repurchase
a. Assume first that JCI distributes the $500 million as dividends. Fill in the missing values in the balance sheet
column for July 1, 2014, that is labeled “Distribute as Dividends.” (Hint: Be sure that the balance sheets balance after
you fill in the missing items. Also, assume JCI did not have to establish an account for dividends payable prior to the
distribution.)
b. Now assume that JCI distributes the $500 million through stock repurchases. Fill in the missing values in the
balance sheet column for July 1, 2014, that is labeled “Distribute as Repurchase.” (Hint: Be sure that the balance
sheets balance after you fill in the missing items.)
Check for balance:
Projected
Calculation of
Free Cash
Flow
6/30/2013 6/30/2014
Operating current assets $5,160.00 $5,469.60
Valuation 6/30/2013 6/30/2014
See below for
calculations.
See below for
calculations.
See below for
calculations.
c. Caculate JCI’s horizon value for 6/30/2014. FCF is expected to grow at a constant rate of 6% and JCI’s WACC is
11%. Calculate JCI’s value of operations for 6/30/2013 and 6/30/2014. (Hint: JCI’s value of operations on 6/30/2014 is
equal to the horizon value.)
d. What is JCI’s current intrinsic stock price (the price on 6/30/2013)? What is the projected intrinsic stock price for
6/30/2014?
e. What is the projected intrinsic stock price on 7/1/2014 if JCI distributes the cash as dividends?
f. What is the projected intrinsic stock price on 7/1/2014 if JCI distributes the cash athrough stock repurchases? How
many shares will remain outstanding after the repurchase?
c. Caculate JCI’s projected free cash flow; the tax rate is 40%.