Question

Happy Fliers Aviation Inc.’s free cash flows (FCFs) are expected to grow at a constant long-term growth rate (gLgL) of 20% per year into the future. Next year, the company expects to generate a free cash flow of $2,000,000. The market value of Happy Fliers’s outstanding debt and preferred stock is $9,000,000 and $5,000,000, respectively. Happy Fliers has 3,000,000 shares of common stock outstanding, and its weighted average cost of capital (WACC) is 30%.

Given the preceding information, complete the adjacent table (rounding each value to the nearest whole dollar), and assuming that the firm has not had any nonoperating assets in its balance sheet.

Term	Value
Value of Operations
Value of Firm’s Common Equity
Value of Common Stock (per share)

Oops, a more careful review of Happy Fliers’s balance sheet actually reports a $2,370,000 portfolio of marketable securities. How does this new information affect the intrinsic value of Happy Fliers’s common equity (expressed on a per-share basis) assuming no other changes to the Happy Fliers financial situation? Review the statements below and select those that accurately describe Happy Fliers’s financial situation. Check all that apply.

A. The intrinsic value of the company’s common stock isn’t affected by the new information.

B. The greater the market value of the marketable securities portfolio, the smaller the company’s total intrinsic (entity) value.

C. The intrinsic value of Happy Fliers’s common stock decreases with the inclusion of the company’s marketable securities portfolio into the analysis.

D. The revised intrinsic value of Happy Fliers’s common stock is $2.79 per share.

Answer 1

We can calculate the desired result as follows:

Formulas used in the excel sheet are:

So, the answers are as follows:

A) Value of Operations = $ 20,000,000

B) Value of Firm's Common Equity = $ 6,000,000

C) Value of Common Stock (per share) = $ 2.00

D) New Intrinsic Value comes out to be $ 2.79

Therefore correct answer is option (d)

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