Question

Bayani Bakery's most recent FCF was $48 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 $370 million in debt and $56 million in preferred stock.

1. 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
2. 
   
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5. 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
6. 
   
7. 
   
8. 
   
9. Immediately prior to the repurchase, what is the intrinsic stock price? Round your answer to the nearest cent.
   $   per share
10. 
    
11. 
    
12. 
    
13. 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
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15. 
    
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17. 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.

Using the constant growth model of valuation we get,

Valuation of operations = FCF₁/(WACC - Growth rate) = (48*1.06)/(11%-6%) = 1017.60

E.

Valuation of equity = Value of total operations - Value of Debt - Value of Preferred stock

Value of debt = 370

Value of Preferred stock = 56

Value of equity = 1017.6 - 370 - 56 = 591.6

I.

Immediately prior to the stock repurchase, the stock price is,

Stock price = Value of equity / Shares outstanding

= 591.6/15 = $39.44

M.

Total amount used to repurchase shares = 30

Share price = 39.44

Number of shares repurchased = 30/39.44 = 0.76

Number of shares outstanding post repurchase = 15 - 0.76 = 14.24

Q.

The intrinsic value of the equity post repurchase is still the same in dollar value. In the balance sheet, the treasury stock account goes up by $30 million and the shareholder's equity reduces by $30 million and the assets go down by $30 million, thereby balancing the assets and liabilities..

The intrinsic stock price post repurchase = Value of equity / New shares outstanding

= 591.6/14.24 = 41.54 (increase in stock price as expected from share repurchase .