Question

Bayani Bakery's most recent FCF was $46 million; the FCF is expected to grow at a constant rate of 6%. The firm's WACC is 11%, and it has 15 million shares of common stock outstanding. The firm has $30 million in short-term investments, which it plans to liquidate and distribute to common shareholders via a stock repurchase; the firm has no other nonoperating assets. It has $368 million in debt and $57 million in preferred stock. What is the value of operations? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places. $   million Immediately prior to the repurchase, what is the intrinsic value of equity? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places. $   million Immediately prior to the repurchase, what is the intrinsic stock price? Round your answer to the nearest cent. $   per share How many shares will be repurchased? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places.    million shares How many shares will remain after the repurchase? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places.    million shares Immediately after the repurchase, what is the intrinsic value of equity? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places. $   million The intrinsic stock price? Round your answer to the nearest cent. $   per share

Answer 1

a. value of operations = [recent FCF*(1+constant growth rate)]/(WACC - constant growth rate)

value of operations = [$46 million*(1+0.06)]/(0.11 - 0.06) = ($46 million*1.06)/0.05 = $48.76‬ million/0.05 = $975.2‬0 million

b. intrinsic value of equity = value of operations - value of debt - value of preferred stock = $975.2‬0 million - $368 million - $57 million = $550.2‬0 million

c. intrinsic stock price = intrinsic value of equity/no. of common stock outstanding = $550.2‬0 million/15 million = $36.68‬ per share

d. no. of shares repurchased = funds for stock repurchase/intrinsic stock price = $30 million/$36.68‬ = 0.82 million

in actual scenario, stock repurchase is done at current market price of stock or more than current market price of stock. no information given in the question about current market price of stock or price at which stock will be repurchased. so we are using intrinsic price of stock.

no. of shares remain after repurchase = no. of common stock outstanding before repurchase - no. of shares repurchased = 15 million - 0.82 million = 14.18 million