Question

Purple Panda Pharmaceuticals Inc.’s free cash flows (FCFs) are expected to grow at a constant long-term growth rate ( gL ) of 13% per year into the future. Next year, the company expects to generate a free cash flow of $10,000,000. The market value of Purple Panda’s outstanding debt and preferred stock is $75,000,000 and $41,666,667, respectively. Purple Panda has 4,500,000 shares of common stock outstanding, and its weighted average cost of capital (WACC) is 19%.Given the preceding information, complete the adjacent table (rounding each value to the nearest whole dollar), and assuming that the firm has not had any nonoperating assets in its balance sheet. Term Value Value of Operations Value of Firm's Common Equity Value of Common Stock (per share) Oops, a more careful review of Purple Panda's balance sheet actually reports a $2,370,000 portfolio of marketable securities. How does this new information affect the intrinsic value of Purple Panda's common equity (expressed on a per-share basis) assuming no other changes to the Purple Panda financial situation? Review the statements below and select those that accurately describe Purple Panda's financial situation.

A. The intrinsic value of the company's common stock isn't affected by the new information.
B. The intrinsic value of Purple Panda's common stock decreases with the inclusion of the company's marketable securities portfolio into the analysis.
C. The revised intrinsic value of Purple Panda's common stock is $1.27 per share.
D. The intrinsic value of Purple Panda's common stock increases with the inclusion of the company's marketable securities portfolio into the analysis.

Answer 1

Total value of PPP = $10,000,000 / (19% - 13%) = $166,666,667

Total equity value = $166,666,667 - $41,666,667 = $125,000,000 (preferred stocks are considered equity)

Common stock equity value = $125,000,000 - $75,000,000 = $50,000,000

Per share value = $50,000,000 / 4,500,000 = $11.11 ≈ $11 (to the nearest $)

Oops, a more careful review of Purple Panda's balance sheet actually reports a $2,370,000 portfolio of marketable securities. How does this new information affect the intrinsic value of Purple Panda's common equity (expressed on a per-share basis) assuming no other changes to the Purple Panda financial situation? Review the statements below and select those that accurately describe Purple Panda's financial situation.

• A. The intrinsic value of the company's common stock isn't affected by the new information.

Marketable securities are short term investments (included in current assets). Since we are not given any more information regarding PPP's assets nor how it earns a profit, we cannot determine for sure if this discovery affects stock. personally, I believe it shouldn't unless the securities include high risk stocks that could affect the companies future earnings. We determined the price of PPP based on its future cash flows, not based on its assets.