Solution 11/26/2018
Chapter: 14 Note to authors: Make the actual balance sheets and income statements fixed values for student version.
Problem: 13 Also, for total net op cap for first year, make into fixed values
Inputs
Amount of distribution $500
Tax rate 25%
WACC 11.0%
Number of shares 1,000
FCF constant growth rate 6.0%
Income Statement (Millions of Dollars) 6/30/2019 6/30/2020
Net Sales $19,490 $20,658
Costs (except depreciation) $16,000 $16,960
Earning before int. & tax $2,190 $2,320
Interest expense $150 $152
Earnings before taxes $2,040 $2,168
See below for
calculations.
Balance Sheets (Millions of Dollars) Actual
Assets 6/30/2019 6/30/2020 7/1/2020 7/2/2020
Cash $160 $170 $170 $170
Short-term investments $200 $640 $140 $140
Accounts receivable $2,000 $2,120 $2,120 $2,120
Inventories $3,000 $3,180 $3,180 $3,180
Total current assets $5,360 $6,110 $5,610 $5,610
Net plant and equipment $13,000 $13,780 $13,780 $13,780
Total assets $18,360 $19,890 $19,390 $19,390
Liabilities & Equity
Accounts payable $1,000 $1,060 $1,060 $1,060
Accruals $2,000 $2,120 $2,120 $2,120
Short-term debt $400 $124 $124 $124
Long-term debt $2,070 $2,070 $2,070 $2,070
Treasury stock ($400) ($400) ($400) ($900)
Retained earnings $7,440 $9,066 $8,566 $9,066
Total common equity $12,890 $14,516 $14,016 $14,016
Check for balance: $0.0 $0.0 $0.0 $0.0
Projected
Calculation of
Free Cash
Flow
6/30/2019 6/30/2020
Operating current assets $5,470.00
Operating current liabilities 3,180.00
Net operating working capital $2,290.00
Net plant & equipment 13,780.00
Total net operating capital $15,160.00 $16,070.00
Net operating profit after taxes $1,740.00
Inv. in operating capital 910.00
11%. Calculate JCI’s value of operations for 6/30/2019 and 6/30/2020. (Hint: JCI’s value of operations on 6/30/2020 is
equal to the horizon value.)
c. Caculate JCI’s projected free cash flow; the tax rate is 25%.
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, 2020 (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, 2020, 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, 2020, 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, 2020, that is labeled “Distribute as Repurchase.” (Hint: Be sure that the balance
sheets balance after you fill in the missing items.)
Valuation 6/30/2019 6/30/2020
Horizon value $17,596.00
Value of operations $16,600.00 $17,596.00
See below for
calculations.
See below for
calculations.
See below for
calculations.
Distribute as
Dividend
Distribute as
Repurchase
d. What is JCI’s current intrinsic stock price (the price on 6/30/2019)? What is the projected intrinsic stock price for
e. What is the projected intrinsic stock price on 7/1/2020 if JCI distributes the cash as dividends?
f. What is the projected intrinsic stock price on 7/1/2020 if JCI distributes the cash athrough stock repurchases? How
many shares will remain outstanding after the repurchase?