Chapter: Problem: 14 13 11/26/2018 J. Clark Inc. (JCI), a manufacturer and distributer of sports equipment, has grown until it has become a stable, mature company. Now JCI is planning its first distribution to shareholders. Shown below are the most recent year's financial statements and projections for the next year, 2020 (JCI has a fiscal year ending on June 30). JCI plans to liquidate $500 million of its short-term securities and distribute them on July 1, 2020, the first day of the next fiscal year, but has not yet decided whether to distribute with dividends or with stock repurchases. Inputs Amount of distribution Tax rate WACC $500 25% 11.0% Number of shares 1,000 FCF constant growth rate 6.0% Actual Projected Income Statement (Millions of Dollars) 6/30/2019 6/30/2020 Net Sales $19,490 $20,658 Costs (except depreciation) $16,000 $16,960 Depreciation $1,300 $1,378 Earning before int. & tax $2,190 $2,320 Interest expense Earnings before taxes Taxes $150 $152 $2,040 $510 $2,168 Net income $1,530 $542 $1,626 Activate Go to Set 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.) Projected: Balance Sheets (Millions of Dollars) Actual Prior to Distribution Distribute as Distribute as Dividend Repurchase Assets 6/30/2019 6/30/2020 7/1/2020 7/2/2020 Cash $160 $170 $170 $170 Short-term investments $200 $640 Accounts receivable $2,000 $2,120 $2,120 $2,120 Inventories $3,000 $3,180 $3,180 $3,180 Total current assets $5,360 $6,110 $5,470 $5,470 Net plant and equipment $13,000 $13,780 $13,780 $13,780 Total assets $18,360 $19,890 $19.250 $19,250 Liabilities & Equity Accounts payable $1,000 $1,060 $1,060 $1,060 Accruals $2,000 $2,120 $2,120 $2,120 Short-term debt $400 $124 $124 $124 Total current liabilities $3,400 $3,304 $3,304 $3,304 Long-term debt $2,070 $2,070 $2,070 $2,070 Total liabilities $5,470 $5,374 $5,374 $5,374 Common stock $5,850 $5,850 $5,850 $5,850 Treasury stock ($400) ($400) Retained earnings $7,440 $9,066 Total common equity $12,890 $14,516 $5,850 $5,850 Total liabilities & equity $18,360 $19,890 $11,224 $11,224 NOT NOT BALANCED! Check for balance: $0.0 $0.0 $8,026.0 BALANCED! $8,026.0 c. Caculate JCI's projected free cash flow; the tax rate is 25%. 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 Projected 6/30/2019 6/30/2020 $15,160.00 Inv. in operating capital 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. Value of operations + Value of nonoperating assets Total intrinsic value of firm - Debt Intrinsic value of equity + Number of shares Intrinsic price per share Distribute as 6/30/2019 6/30/2020 Dividend 7/1/2020 Distribute as Repurchase 7/1/2020