Wenyu Li MINI CASE Essay - 2092 Words

Wenyu Li BUS 581 03/01/2015 Chapter 7 MINI CASE Your employer, a mid-sized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporary heavy workloads. Your employer is also considering the purchase of a Biggerstaff Biggerstaff (BB), a privately held company owned by two brothers, each with 5 million shares of stock. BB currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. BB’s financial statements report marketable securities of $100 million, debt of $200 million, and preferred stock of $50 million.†¦show more content†¦The valuation process, in this case, requires us to estimate the short-run non-constant growth rate and predict future dividends. Then, we must estimate a constant long-term growth rate at which the firm is expected to grow. Generally, we assume that after a certain point of time, all firms begin to grow at a rather constant rate. Of course, the difficulty in this framework is estimating the short-term growth rate, how long the short-term growth will hold, and the long-term growth rate. What are the expected dividend yield and capital gains yield during the first year? P0=46.66 Expected dividend yield= 2.6/46.66 = 5.6% Capital gains yield= 7.4% What are the expected dividend yield and capital gains yield during the fourth year (from Year 3 to Year 4)? †¨ P3= 56.5964 Expected dividend yield = 7.0% Capital gains yield= 6.0% i. What is free cash flow (FCF)? A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, its tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as:EBIT(1-Tax Rate) + Depreciation Amortization - Change in Net Working Capital - Capital ExpenditureIt can also be