C Desde NU FFE models have in common, bead of the research department of Peninsular Rese insular Research. One of ing. Mackinac Inc., is a US-based manufacturing company. June 2007 financial statements shown in Exhibits 1, 2 and 3. John Jones, CFA, ish companies he is research Mackinac has released the EXHIBITI BIT1 Mackinac Inc. Annual Income Statement une 2007 (in Thousands, except Per-Share Data 30 June 2007 (in $250,000 125.000 125,000 50,000 75.000 10,500 Sales Cost of goods sold Gross operating profit Selling general, and administrative expenses EBITDA Depreciation and amortization EBIT Interest expense Pretax income Income taxes Net income Shares outstanding EPS 64,500 11,000 53.500 16,050 $37.450 13,000 $2.88 EXHIBIT 2 Mackinac Inc. Balance Sheet 30 June 2007 (in Thousands) Current Assets Cash and equivalents Receivables Inventories $20,000 40,000 29,000 23,000 $112,000 Other current assets Toal current assets Noncurrent Assets Property, plant, and equipment Less: Accumulated depreciation Net property, plant, and equipment $145,000 43,000 Investments Other noncurrent assets Toul noncurrent assets 102,000 70,000 36,000 208,000 $320,000 Total assets (continued Equity Asset Val 356 $41.000 12,000 17.000 EXHIBIT 2 (Continued) Current Liabilities Accounts payable Short-term debe Other current liabilities Total current liabilities Noncurrent Liabilities Long-term debe Tocal noncurrent liabilities 100,000 40,000 110,000 Toral liabilities Shareholders' Equity Common equity Retained earnings Total equity Tocal liabilities and equity $37.450 1050 EXHIBIT 3 Mackinac Inc. Statement of Cash Flows 30 June 2007 (in Thousands Cash Flow from Operating Activities Net income Depreciation and amortization Change in Working Capital (Increase) decrease in receivables ($5,000) (Increase) decrease in inventories (8,000) Increase (decrease) in payables 6,000 Increase (decrease) in other current liabilities 1,500 Net change in working capital Net cash from operating activities Cash Flow from Investing Activities Purchase of property, plant, and equipment ($15,000) Net cash from investing activities Cash Flow from Financing Activities $42.450 ($15.000 $4,000 (22,470) Change in debt outstanding Payment of cash dividends Net cash from financing activities Net change in cash and cash equivalents Cash at beginning of period Cash at end of period Mackinac has announced that it has finalized an agreement to handle North American production of a successful product currently marketed by a company headquartered out- side North America. Jones decides to value Mackinac by using the DDM and FCFE models. After reviewing Mackinac's financial statements and forecasts related to the new production agreement, Jones concludes the following: Mackinac's earnings and FCFE are expected to grow 17 percent a year over the next three years before stabilizing at an annual growth rate of 9 percent. Mackinac will maintain the current payout ratio. Mackinac's beta is 1.25. The government bond yield is 6 percent, and the market equity risk premium is 5 percent. A. Calculate the value of a share of Mackinac's common stock by using the two-stage DDM. B. Calculate the value of a share of Mackinac's common stock by using the two-stage FCFE model. C. Jones is discussing with a corporate client the possibility of that client acquiring a 70 percent interest in Mackinac. Discuss whether the DDM or FCFE model is more ap- propriate for this client's valuation purposes. 11 Ring and computer communication C Desde NU FFE models have in common, bead of the research department of Peninsular Rese insular Research. One of ing. Mackinac Inc., is a US-based manufacturing company. June 2007 financial statements shown in Exhibits 1, 2 and 3. John Jones, CFA, ish companies he is research Mackinac has released the EXHIBITI BIT1 Mackinac Inc. Annual Income Statement une 2007 (in Thousands, except Per-Share Data 30 June 2007 (in $250,000 125.000 125,000 50,000 75.000 10,500 Sales Cost of goods sold Gross operating profit Selling general, and administrative expenses EBITDA Depreciation and amortization EBIT Interest expense Pretax income Income taxes Net income Shares outstanding EPS 64,500 11,000 53.500 16,050 $37.450 13,000 $2.88 EXHIBIT 2 Mackinac Inc. Balance Sheet 30 June 2007 (in Thousands) Current Assets Cash and equivalents Receivables Inventories $20,000 40,000 29,000 23,000 $112,000 Other current assets Toal current assets Noncurrent Assets Property, plant, and equipment Less: Accumulated depreciation Net property, plant, and equipment $145,000 43,000 Investments Other noncurrent assets Toul noncurrent assets 102,000 70,000 36,000 208,000 $320,000 Total assets (continued Equity Asset Val 356 $41.000 12,000 17.000 EXHIBIT 2 (Continued) Current Liabilities Accounts payable Short-term debe Other current liabilities Total current liabilities Noncurrent Liabilities Long-term debe Tocal noncurrent liabilities 100,000 40,000 110,000 Toral liabilities Shareholders' Equity Common equity Retained earnings Total equity Tocal liabilities and equity $37.450 1050 EXHIBIT 3 Mackinac Inc. Statement of Cash Flows 30 June 2007 (in Thousands Cash Flow from Operating Activities Net income Depreciation and amortization Change in Working Capital (Increase) decrease in receivables ($5,000) (Increase) decrease in inventories (8,000) Increase (decrease) in payables 6,000 Increase (decrease) in other current liabilities 1,500 Net change in working capital Net cash from operating activities Cash Flow from Investing Activities Purchase of property, plant, and equipment ($15,000) Net cash from investing activities Cash Flow from Financing Activities $42.450 ($15.000 $4,000 (22,470) Change in debt outstanding Payment of cash dividends Net cash from financing activities Net change in cash and cash equivalents Cash at beginning of period Cash at end of period Mackinac has announced that it has finalized an agreement to handle North American production of a successful product currently marketed by a company headquartered out- side North America. Jones decides to value Mackinac by using the DDM and FCFE models. After reviewing Mackinac's financial statements and forecasts related to the new production agreement, Jones concludes the following: Mackinac's earnings and FCFE are expected to grow 17 percent a year over the next three years before stabilizing at an annual growth rate of 9 percent. Mackinac will maintain the current payout ratio. Mackinac's beta is 1.25. The government bond yield is 6 percent, and the market equity risk premium is 5 percent. A. Calculate the value of a share of Mackinac's common stock by using the two-stage DDM. B. Calculate the value of a share of Mackinac's common stock by using the two-stage FCFE model. C. Jones is discussing with a corporate client the possibility of that client acquiring a 70 percent interest in Mackinac. Discuss whether the DDM or FCFE model is more ap- propriate for this client's valuation purposes. 11 Ring and computer communication