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 Number of shares FCF constant growth rate $500 25% 11.0% 1,000 6.0% Income Statement (Million Net Sales Costs (except depreciation Depreciation Earning before int. & tax Interest expense Earnings before taxes Taxes Net income Actual 6/30/19 $19,490 $16,000 $1,300 $2,190 $150 $2,040 $510 $1,530 Projected 6/30/20 $20,658 $16,960 $1,378 $2,320 $152 $2,168 $542 $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.) Distribute as Dividend 7/1/2020 $170 Distribute as Repurchase 7/2/2020 $170 Balance Sheets (Millions o Assets Cash Short-term investments Accounts receivable Inventories Total current assets Net plant and equip ent Total assets Liabilities & Equity Accounts payable Accruals Projected: Prior to Actual Distribution 6/30/2019 6/30/2020 $160 $170 $200 $640 $2,000 $2,120 $3.000 $3.180 $5,360 $6,110 $13.000 $13.780 $18,360 $19,890 $2,120 $3.180 $5,470 $13.780 $19,250 $2,120 $3.180 $5,470 $13.780 $19,250 $1,000 $2,000 $1,060 $2,120 $1,060 $2,120 $1,060 $2,120 Income Statement (Million Net Sales Costs (except depreciation Depreciation Earning before int. & tax Interest expense Earnings before taxes Taxes Net income Actual 6/30/19 $19,490 $16,000 $1,300 $2,190 $150 $2,040 $510 $1,530 Projected 6/30/20 $20,658 $16,960 $1,378 $2,320 $152 $2,168 $542 $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.) Distribute as Dividend 7/1/2020 $170 Distribute as Repurchase 7/2/2020 $170 Projected: Prior to Actual Distribution 6/30/2019 6/30/2020 $160 $170 $200 $640 $2,000 $2,120 $3.000 $3.180 $5,360 $6,110 $13.000 $13.780 $18,360 $19,890 $2,120 $3.180 $5,470 $13.780 $19,250 $2,120 $3.180 $5,470 $13.789 $19,250 Balance Sheets (Millions a Assets Cash Short-term investments Accounts receivable Inventories Total current assets Net plant and equipment Total assets Liabilities & Equity Accounts payable Accruals Short-term debt Total current liabilities Long-term debt otal liabilities Common stock Treasury stock Retained earnings Total common equity Total liabilities & equit $1,000 $2,000 $400 $3,400 $2.070 $5,470 $5,850 ($400) $7.440 $12.890 $18,360 $1,060 $2,120 $124 $3,304 $2.070 $5,374 $5,850 ($400) $9.066 $14,516 $19,890 $1,060 $2,120 $124 $3,304 $2.070 $5,374 $5,850 $1,060 $2,120 $124 $3,304 $2.070 $5,374 $5,850 $5.850 $11,224 NUT BALANCED $5.850 $11,224 NUI BALANCED Check for balance: $0.0 $0.0 $8,026.0 $8,026.0 C. Caculate JCI's projected free cash flow; the tax rate is 25%. Projected 6/30/2020 Calculation of Free Cash Flow 6/30/2019 Operating current assets Operating current liabilities Net operating working capital Net plant & equipment Total net operating capital $15,160.00 Net operating profit after taxes 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.) 6/30/2019 6/30/2020 Valuation Horizon value Value of operations 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. Distribute as Dividend 7/1/2020 Distribute as Repurchase 7/1/2020 6/30/2019 6/30/2020 Value of operations je of nonoperating assets Cotal intrinsic value of firm - Debt Intrinsic value of equity Number of shares Intrinsic price per share

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