Question

Start with the partial model in the file Ch15 P13 Build a Model.xls on the textbook's Web site. J. Clark Inc. (JCI), a manufacturer and distributor of sports equipment, has grown until it has become a stable, mature company. Now JCI is planning its first distribution to shareholders. (See the file for the most recent year's financial statements and projections for the next year, 2016; JCI's fiscal year ends on June 30.) JCI plans to liquidate and distribute $500 million of its short-term securities on July 1, 2016, the first day of the next fiscal year, but it 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 file's balance sheet column for July 1, 2016, which is labeled "Distribute as Dividends." Assume that 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 file's balance sheet
 column for July 1, 2016, which is labeled "Distribute as Repurchase."

c. Calculate JCI's projected free cash flow; the tax rate is 40%.

d. What is JCI's current intrinsic stock price (the price on 6/30/2015)? What is the projected intrinsic stock price for 6/30/2016?

e. What is the projected intrinsic stock price on 7/1/2016 if JCI distributes the cash as dividends?

f. What is the projected intrinsic stock price on 7/1/2016 if JCI distributes the cash through stock repurchases? How many shares will remain outstanding after the repurchase?

Answer 1

a. Inputs
Amount of distribution		$500
Tax rate		40%
WACC		11.0%
Number of shares		1,000
FCF constant growth rate		6.0%
		Actual	Projected
Income Statement (Millions of Dollars)		6/30/2015	6/30/2016
Net Sales		$20,000.00	$21,200.00
Costs (except depreciation)		$16,000.00	$16,960.00
Depreciation		$1,300.00	$1,378.00
Earning before int. & tax		$2,700.00	$2,862.00
Interest expense		$150.00	$152.82
Earnings before taxes		$2,550.00	$2,709.18
Taxes		$1,020.00	$1,083.67
Net income		$1,530.00	$1,625.51
b.
			Projected: Prior to Distribution		Distribute as Dividend		Distribute as Repurchase
Balance Sheets (Millions of Dollars)		Actual
Assets		6/30/2015	6/30/2016		7/1/2016		7/2/2016
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
Net plant and equipment		$13,000.00	$13,780.00		$13,780.00		$13,780.00
Total assets		$18,360.00	$19,889.60		$19,389.60		$19,389.60
Liabilities & Equity
Accounts payable		$1,000.00	$1,060.00		$1,060.00		$1,060.00
Accruals		$2,000.00	$2,120.00		$2,120.00		$2,120.00
Short-term debt		$400.00	$0.00		$0.00		$0.00
Total current liabilities		$3,400.00	$3,180.00		$3,180.00		$3,180.00
Long-term debt		$2,068.18	$2,192.27		$2,192.27		$2,192.27
Total liabilities		$5,468.18	$5,372.27		$5,372.27		$5,372.27
Common stock		$5,851.82	$5,851.82		$5,851.82		$5,851.82
Treasury stock		($400.00)	($400.00)		($400.00)		($900.00)
Retained earnings		$7,440.00	$9,065.51		$8,565.51		$9,065.51
Total common equity		$12,891.82	$14,517.33		$14,017.33		$14,017.33
Total liabilities & equity		$18,360.00	$19,889.60		$19,389.60		$19,389.60
Check for balance:
c.
			Projected
Calculation of Free Cash Flow		6/30/2015	6/30/2016
Operating current assets		$5,160.00	$5,469.60
Operating current liabilities		3,000.00	3,180.00
Net operating working capital		$2,160.00	$2,289.60
Net plant & equipment		13,000.00	13,780.00
Total net operating capital		$15,160.00	$16,069.60
Net operating profit after taxes		$1,620.00	$1,717.20
Inv. in operating capital			909.60
Free cash flow (FCF)			$807.60
Valuation		6/30/2015	6/30/2016
Horizon value			$17,121.12
Value of operations		$16,152.00	$17,121.12
a, d, e & f					Distribute as Dividend		Distribute as Repurchase
		6/30/2015	6/30/2016		7/1/2016		7/1/2016
	Value of operations	$16,152.0	$17,121.1		$17,121.1		$17,121.1
	+ Value of nonoperating assets	200.0	640.0		140.0		140.0
	Total intrinsic value of firm	$16,352.0	$17,761.1		$17,261.1		$17,261.1
	− Debt	2,468.2	2,192.3		2,192.3		$2,192.3
	Intrinsic value of equity	$13,883.8	$15,568.8		$15,068.8		$15,068.8
	÷ Number of shares	1,000.00	1,000.00		1,000.00		967.88
	Intrinsic price per share	$13.88	$15.57		$15.07		$15.57

Intrinsic price per share

$13.88

$15.57

$15.07

$15.57