Read the Chapter 7 Mini Case on pages 339-341 inFinancial Management:
Your employer, a mid-sized human resources management company, is considering expan-sion into related ﬁelds, including the acquisition of Temp Force Company, an employmentagency that supplies word processor operators and computer programmers to businesseswith temporary heavy workloads. Your employer is also considering the purchase of Bigger-staff 8: McDonald (B&M), a privately held company owned by two friends, each with5 mﬂlion shares of stock. B&M currently has free cash ﬂow of $24 million, which is expectedto grow at a constant rate of 5%. B&M’s financial statements report short-term investmentsof $100 million, debt of $200 million, and preferred stock of $50 million. B&M’s weightedaverage cost of capital (WACC) is 11%. Answer the following questions. a. Describe brieﬂy the legal rights and privileges of common stockholders. b. What is free cash ﬂow (FCF)? What is the weighted average cost of capital? What is thefree cash ﬂow valuation model? c. Use a pie chart to illustrate the sources that comprise a hypothetical company’s totalvalue. Using another pie chart, show the claims on a company’s value. How is equity aresidual claim? d. Suppose the free cash ﬂow at Time 1 is expected to grow at a constant rate of gLforever. 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 togrow 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?
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