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A B C D E F G H I J K L M N
Classified Stock carries special provisions. For example, shares could be classified as founders’ shares which come with voting
rights but dividend restrictions.
11/20/2018
Situation
Features of Common Stock
Data for charts
Column1
10
Mkt. Sec. 1
Claims on Value
Pref. Stk. 1
Debt 3
7
If constant growth begins at Time 1:
Chapter 7 Mini Case
Your employer, a mid-sized human resources management company, is considering expansion into related fields, including the
acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers
to businesses with temporary heavy workloads. Your employer is also considering the purchase of Biggerstaff & McDonald
(B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of
$24 million, which is expected to grow at a constant rate of 5%. B&M’s financial statements report short-term investments of
$100 million, debt of $200 million, and preferred stock of $50 million. B&M’s weighted average cost of capital (WACC) is 11%.
Answer the following questions.
1. Common Stock represents ownership. 2. Ownership implies control. 3. Stockholders elect directors. 4. Directors hire
management who attempt to maximize stock price.
a. Describe briefly the legal rights and privileges of common stockholders.
d. Suppose the free cash flow at Time 1 is expected to grow at a constant rate of gL forever. If gL < WACC, what is a formula for
the present value of expected free cash flows when discounted at the WACC? If the most recent free cash flow is expected to
grow at a constant rate of gL forever (and gL < WACC), what is a formula for the present value of expected free cash flows when
discounted at the WACC?
Value of Operations
Equity
L
1
0,op gWACC
FCF
V−
=
Scenario Summary
Current Values: No Change Improve Growth Improve OP Improve CR Improve All Improve OP and CR Improve OP and Growth Improve CR and Growth
Changing Cells:
$A$304 No Change No Change Improve Growth Improve OP Improve CR Improve All Improve OP and CR
Improve OP and Growth
Improve Growth
$C$310 10% 10% 11% 10% 10% 11% 10% 11% 11%
$D$310 8% 8% 9% 8% 8% 9% 8% 9% 9%
$E$310 5% 5% 6% 5% 5% 6% 5% 6% 6%
$F$310 5% 5% 6% 5% 5% 6% 5% 6% 6%
Result Cells: