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 business with temporary heavy workloads. Your employer is also considering the purchase of a Biggerstaff & Biggerstaff (B&B), a privately help company owned by two million, which is expected to grow at a constant rate of 5%. B&B’s financial statements report marketable securities of $100 million, debt of $200 million, and preferred stock of $50 million. B&B’s WACC is 11%. Answer the following questions.

 

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

 

B. Assume that Temp Force has a beta coefficient of 1.2, that the risk-free rate ( the yield on T-bonds) is 7.0%, and that the market risk premium is 5%. What is the required rate of return on the firm’s stock?

 

C. Assume that Temp Force isa constant growth company whose last dividend Dd, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 6% rate.

 

1. what is the firm’s current estimated intrinsic stock price?

 

D. Why are stock prices volatile? Using Temp Force as an example, what is the impact on the estimated stock price if g falls to 5% or rises to 7%? If rs changes to 12% or to 14%?

 

E. Use B&B’s data and the free cash flow model to answer the following questions.

 

1. What is its estimated value of operations?

 

2. What is its estimated total corporate value?

 

3. What is its estimated intrinsic value of equity?

 

4. What is its estimated intrinsic stock price per share?