Your employer, a midsized human resources management company, is considering expansion intorelated fields, including the acquisition of Temp ForceCompany, an employment agency that supplies wordprocessor operators and computer programmersto businesses with temporarily heavy workloads.Your employer is also considering the purchase ofBiggerstaff & McDonald (B&M), a privately heldcompany owned by two friends, each with 5 millionshares 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 reportshort-term investments of $100 million, debt of $200million, and preferred stock of $50 million. B&M’sweighted average cost of capital (WACC) is 11%.Answer the following questions: . (1) Write out a formula that can be used to valueany dividend-paying stock, regardless of itsdividend pattern.(2) What is a constant growth stock? How areconstant growth stocks valued?(3) What happens if a company has a constantgLthat exceeds its rs? Will many stocks haveexpected growth greater than the requiredrate of return in the short run (i.e., for the nextfew years)? In the long run (i.e., forever)?
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
$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
weighted average cost of capital (WACC) is 11%.
Answer the following questions:
. (1) Write out a formula that can be used to value
any dividend-paying stock, regardless of its
dividend pattern.
(2) What is a constant growth stock? How are
constant growth stocks valued?
(3) What happens if a company has a constant
gL
that exceeds its rs
? Will many stocks have
expected growth greater than the required
rate of return in the short run (i.e., for the next
few years)? In the long run (i.e., forever)?
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