Read the Chapter 7 Mini Case in?Financial Management: Theory and Practice. Complete Parts 1 and 2. Part 1: Using complete sentences and academic vocabulary, please answer questions a t

Book Title: eTextbook: Financial Management: Theory and Practice Chapter 7. Corporate Valuation and Stock Valuation Mini Case

Mini Case Your employer, a midsized 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 temporarily heavy workloads.

Your employer is also considering the purchase of Biggerstaff & McDonald (B&M), a privately held

company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of

$24 million, which is expected to grow at a constant rate of 5%. B&M’s financial statements report short-

term investments of $100 million, debt of $200 million, and preferred stock of $50 million. B&M’s

weighted average cost of capital (WACC) is 11%. Answer the following questions:

a. Describe briefly the legal rights and privileges of common stockholders.

b. What is free cash flow (FCF)? What is the weighted average cost of capital? What is the free cash

flow valuation model?

c. Use a pie chart to illustrate the sources that comprise a hypothetical company’s total value.

Using another pie chart, show the claims on a company’s value. How is equity a residual claim?

d. Suppose the free cash flow at Time 1 is expected to grow at a constant rate of forever. If

, what is a formula for the present value of expected free cash flows when

discounted at the WACC? If the most recent free cash flow is expected to grow at a constant rate

of forever (and ), what is a formula for the present value of expected free cash

flows when discounted at the WACC?

e. Use B&M’s data and the free cash flow valuation model to answer the following questions:

gL

gL < WACC

gL gL < WACC