Question

15-12: Stock Repurchase Bayani Bakery's most recent FCF was $50 million; the FCF is expected to grow at a constant rate of 5%. The firm's WACC is 10%, and it has $20 million shares of common stock outstanding. The firm has $86 million in short-term investments, which it plans to liquidate and distribute to common shareholders via a stock repurchase; the firm has no other non-operating assets. It has $368 million in debt and $68 million in preferred stock. a. What is the value of operations? b. Immediately prior to the repurchase, what is the intrinsic value of equity? c. Immediately prior to the repurchase, what is the intrinsic stock price? d. How many shares will be repurchased? How many shares will remain after the repurchase? e. Immediately after the repurchase, what is the intrinsic value of equity? The intrinsic stock price?

Answer 1

a. Value of operations

Given the dividend discount method, the value is;

= FCF ( 1 + g) / ( WACC - g)

= 50 ( 1 + 5%) / (10% - 5%)

= $1,050‬ million

b. Intrinsic Value of equity prior to repurchase

= Total value of firm - Debt - Preferred Stock

= ( Value of operations + Short term investment) - Debt - Preferred stock

= ( 1,050 + 86) - 368 - 68

= $700 million

c. Stock price prior to repurchase

= Value of stock/ No. of stock

= 700/20

= $35

d. Stock to be repurchased

= Short term investment / Stock price

= 86,000,000/35

= 2,457,143 shares

Number of stock remaining

= 20,000,000 - 2,457,143

= 17,542,857‬ shares

e. Intrinsic Value of equity after repurchase

= ( Value of operations + Short term investment) - Debt - Preferred stock

= ( 1,050 + 0) - 368 - 68

= $614 million

Intrinsic stock price

= Value of stock/ No. of stock

= 614,000,000/17,542,857‬

= $35