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Chapter: Problem: 14 13 J. Clark Inc. (JCI), a manufacturer and distributer of sports equipment, has grown until it has become a stable, mature co Now JCI is planning its first distribution to shareholders. Shown below are the most recent year's financial statements a projections for the next year, 2020 (JCI has a fiscal year ending on June 30). JCI plans to liquidate $500 million of its sh securities and distribute them on July 1, 2020, the first day of the next fiscal year, but has not yet decided whether to dis dividends or with stock repurchases. Inputs Amount of distribution Tax rate WACC Number of shares FCF constant growth rate Income Statement (Millions of Dollars) Net Sales Costs (except depreciation) Depreciation Earning before int. & tax Interest expense Earnings before taxes Taxes Net income $500 25% 11.0% 1,000 6.0% Actual 6/30/2019 $19,490 $16,000 $1,300 $2,190 $150 $2,040 $510 Projected 6/30/2020 $20,658 $16,960 $1,378 $2,320 $152 $2,168 $542 $1,530 $1,626 a. Assume first that JCI distributes the $500 million as dividends. Fill in the missing values in the balance sheet column for July 1, 2020, that is labeled "Distribute as Dividends." (Hint: Be sure that the balance sheets balance after you fill in the missing items. Also, assume JCI did not have to establish an account for dividends payable prior to the distribution.) See below for calculations. b. Now assume that JCI distributes the $500 million through stock repurchases. Fill in the missing values in the balance sheet column for July 1, 2020, that is labeled "Distribute as Repurchase." (Hint: Be sure that the balance sheets balance after you fill in the missing items.) Balance Sheets (Millions of Dollars) Assets Cash Short-term investments Accounts receivable Inventories Projected: Prior to Actual Distribution 6/30/2019 6/30/2020 $160 $170 $200 $640 $2,000 $2,120 $3,000 $3,180 Distribute as Dividend 7/1/2020 $170 $2,120 $3,180 Total current assets Net plant and equipment Total assets Liabilities & Equity Accounts payable Accruals Short-term debt $5,360 $13,000 $18,360 $6,110 $13,780 $19,890 $5,470 $13,780 $19,250 $1,000 $2,000 $400 $1,060 $2,120 $124 $1,060 $2,120 $124 Total current liabilities Long-term debt Total liabilities Common stock Treasury stock Retained earnings Total common equity Total liabilities & equity $3,400 $2,070 $5,470 $5,850 ($400) $7,440 $12,890 $18,360 $3,304 $2,070 $5,374 $5,850 ($400) $9,066 $14,516 $19,890 $3,304 $2,070 $5,374 $5,850 $5,850 $11,224 NOT BALANCED! Check for balance: $0.0 $0.0 $8,026.0 c. Caculate JCI's projected free cash flow; the tax rate is 25%. Projected Calculation of Free Cash Flow Operating current assets Operating current liabilities Net operating working capital Net plant & equipment Total net operating capital Net operating profit after taxes Inv. in operating capital 6/30/2019 6/30/2020 $15,160.00 Free cash flow (FCF) c. Caculate JCI's horizon value for 6/30/2020. FCF is expected to grow at a constant rate of 6% and JCI's WACC is 11%. Calculate JCI's value of operations for 6/30/2019 and 6/30/2020. (Hint: JCI's value of operations on 6/30/2020 is equal to the horizon value.) Valuation Horizon value Value of operations 6/30/2019 6/30/2020 d. What is JCI's current intrinsic stock price (the price on 6/30/2019)? What is the projected intrinsic stock price for 6/30/2020? See below for calculations. e. What is the projected intrinsic stock price on 7/1/2020 if JCI distributes the cash as dividends? See below for calculations. f. What is the projected intrinsic stock price on 7/1/2020 if JCI distributes the cash athrough stock repurchases? How many shares will remain outstanding after the repurchase? See below for calculations. 6/30/2019 Value of operations + Value of nonoperating assets Total intrinsic value of firm Debt Intrinsic value of equity Number of shares Intrinsic price per share 6/30/2020 Distribute as Dividend 7/1/2020 11/26/2018 become a stable, mature company. ear's financial statements and idate $500 million of its short-term yet decided whether to distribute with n the balance sheet nce sheets balance after nds payable prior to the missing values in the ure that the balance Distribute as Repurchase 7/2/2020 $170 $2,120 $3,180 $5,470 $13,780 $19,250 $1,060 $2,120 $124 $3,304 $2,070 $5,374 $5,850 $5,850 $11,224 NOT BALANCED! $8,026.0 % and JCI's WACC is rations on 6/30/2020 is ntrinsic stock price for nds? stock repurchases? How Distribute as Repurchase 7/1/2020
