Question

The IAM Appmath’s most recent FCF was $48 million; the FCF is expected to grow at a constant rate of 6%. The firm’s WACC is 12% 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 $60 million in preferred stock.

a. What is the value of operations?

b. Immediately prior to the repurchase, what is the intrinsic value of equity?

c. Immediately prior to the repurchase, what is the intrinsic stock price?

d. How many shares will be repurchased? How many shares will remain after the repurchase?

e. Immediately after the repurchase, what is the intrinsic value of equity? The intrinsic stock price?

Answer 1

The solution is as shown in the table below:

	Prior to Repurchase	After Repurchase
Value of operations (FCF(1+g))/(WACC-g)	848000000	848000000
			Add: Value of Non-operating assets	30000000	0
Total Intrinsic Value	878000000	848000000
Less: Debt	368000000	368000000
Less: Preferred Stock	60000000	60000000
Intrinsic Equity Value	450000000	420000000
Divide by: Number of shares	15000000	14000000
Intrinsic Stock Price	30	30
# of shares repurchased (Cash used in repurchase)/ Price	1000000

First Row: Value of operations = FCF*(1+g)/ (WACC-g) = 48,000,000*(1+0.06)/(0.12-0.06) = 848,000,000

Number of shares repurchased = Cash used in repurchase/ Price = 30,000,000/30 = 1,000,000

The answers from the table are tabulated below:

a. $848,000,000 or $848 Million

b. $450,000,000 or $450 Million

c. $30

d. 1,000,000 shares, Remaining shares = 15,000,000 -1,000,000 = 14,000,000 or 14 million shares

e. $420,000,000 Million or 420 Million, $30