J K A B D E F G H I 1 2 Chapter: 14 3 Problem: 13 4 5 6 J. Clark Inc. (JCI), a manufacturer and distributer of sports equipment, has grown until it has become a stable, mature company. Now JCI is 7 planning its first distribution to shareholders. Shown below are the most recent year's financial statements and projections for the next year, 8 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, 9 2020, the first day of the next fiscal year, but has not yet decided whether to distribute with dividends or with stock repurchases. 10 11 12 Inputs 13 Amount of distribution $500 14 Tax rate 25% 15 WACC 11.0% 16 Number of shares 1,000 17 FCF constant growth rate 6.0% 18 19 Actual Projected 20 Income Statement (Millions of Dollars) 6/30/2019 6/30/2020 21 Net Sales $19,490 $20,658 22 Costs (except depreciation) $16,000 $16,960 23 Depreciation $1,300 $1,378 24 Earning before int. & tax $2,190 $2,320 25 Interest expense $150 $152 26 Earnings before taxes $2,040 $2,168 27 Taxes $510 $542 28 Net income $1,530 $1,626 29 30 31 a. Assume first that JCI distributes the $500 million as dividends. Fill in the missing values in the balance sheet column for July 32 1, 2020, that is labeled "Distribute as Dividends." (Hint: Be sure that the balance sheets balance after you fill in the missing items. 83 Also assume JCI did not have to establish an account for dividends pavable prior to the distribution) B D E F G H I J K K L M N 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. 5b. 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 Distribute as Repurchase 7/2/2020 $170 $170 Balance Sheets (Millions of Dollars) Assets 4 Cash 5 Short-term investments 5 Accounts receivable Inventories 3 Total current assets Net plant and equipment Total assets 1 Liabilities & Equity 2 Accounts payable B Accruals 4 Short-term debt 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 $400 $1,060 $2,120 $124 $1,060 $2,120 $124 $1,060 $2,120 $124 $3,304 $2,070 $5,374 $5,850 $3,304 $2,070 $5,374 $5,850 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 $5,850 $11,224 $5,850 $11,224 NOT BALANCED! $8,026.0 NOT BALANCED! Check for balance: $0.0 $0.0 $8,026.0 I J B D F F G H 66 C. Caculate JCI's projected free cash flow; the tax rate is 25%. 67 68 Projected Calculation of Free Cash 69 Flow 6/30/2019 6/30/2020 70 Operating current assets 71 Operating current liabilities 72 Net operating working capital 73 Net plant & equipment 74 Total net operating capital $15,160.00 75 Net operating profit after taxes 76 Inv. in operating capital Free cash flow (FCF) 77 78 79 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%. 80 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 81 horizon value.) 82 83 Valuation 6/30/2019 6/30/2020 84 Horizon value 85 Value of operations 86 87 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? 88 See below for 89 calculations. 90 e. What is the projected intrinsic stock price on 7/1/2020 if JCI distributes the cash as dividends? See below for 91 calculations. 92 f. What is the projected intrinsic stock price on 7/1/2020 if JCI distributes the cash athrough stock repurchases? How many 93 shares will remain outstanding after the repurchase? See below for 94 calculations. 95 96 Distribute as Distribute as 97 Dividend Repurchase 98 6/30/2019 6/30/2020 7/1/2020 7/1/2020 Value of anarstiane Build a Model 00 A B D E F G H 80 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 31 horizon value.) 32 83 Valuation 6/30/2019 6/30/2020 84 Horizon value 85 Value of operations 36 37 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? 38 See below for 39 calculations. 90 e. What is the projected intrinsic stock price on 7/1/2020 if JCI distributes the cash as dividends? See below for 91 calculations. 92 f. What is the projected intrinsic stock price on 7/1/2020 if JCI distributes the cash athrough stock repurchases? How many 93 shares will remain outstanding after the repurchase? See below for 94 calculations. 25 26 Distribute as Distribute as 27 Dividend Repurchase 28 6/30/2019 6/30/2020 7/1/2020 7/1/2020 29 Value of operations 00 + Value of nonoperating assets 01 Total intrinsic value of firm 02 - Debt 03 Intrinsic value of equity 04 - Number of shares 05 Intrinsic price per share 06 07 08 09 10 11 12 J K A B D E F G H I 1 2 Chapter: 14 3 Problem: 13 4 5 6 J. Clark Inc. (JCI), a manufacturer and distributer of sports equipment, has grown until it has become a stable, mature company. Now JCI is 7 planning its first distribution to shareholders. Shown below are the most recent year's financial statements and projections for the next year, 8 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, 9 2020, the first day of the next fiscal year, but has not yet decided whether to distribute with dividends or with stock repurchases. 10 11 12 Inputs 13 Amount of distribution $500 14 Tax rate 25% 15 WACC 11.0% 16 Number of shares 1,000 17 FCF constant growth rate 6.0% 18 19 Actual Projected 20 Income Statement (Millions of Dollars) 6/30/2019 6/30/2020 21 Net Sales $19,490 $20,658 22 Costs (except depreciation) $16,000 $16,960 23 Depreciation $1,300 $1,378 24 Earning before int. & tax $2,190 $2,320 25 Interest expense $150 $152 26 Earnings before taxes $2,040 $2,168 27 Taxes $510 $542 28 Net income $1,530 $1,626 29 30 31 a. Assume first that JCI distributes the $500 million as dividends. Fill in the missing values in the balance sheet column for July 32 1, 2020, that is labeled "Distribute as Dividends." (Hint: Be sure that the balance sheets balance after you fill in the missing items. 83 Also assume JCI did not have to establish an account for dividends pavable prior to the distribution) B D E F G H I J K K L M N 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. 5b. 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 Distribute as Repurchase 7/2/2020 $170 $170 Balance Sheets (Millions of Dollars) Assets 4 Cash 5 Short-term investments 5 Accounts receivable Inventories 3 Total current assets Net plant and equipment Total assets 1 Liabilities & Equity 2 Accounts payable B Accruals 4 Short-term debt 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 $400 $1,060 $2,120 $124 $1,060 $2,120 $124 $1,060 $2,120 $124 $3,304 $2,070 $5,374 $5,850 $3,304 $2,070 $5,374 $5,850 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 $5,850 $11,224 $5,850 $11,224 NOT BALANCED! $8,026.0 NOT BALANCED! Check for balance: $0.0 $0.0 $8,026.0 I J B D F F G H 66 C. Caculate JCI's projected free cash flow; the tax rate is 25%. 67 68 Projected Calculation of Free Cash 69 Flow 6/30/2019 6/30/2020 70 Operating current assets 71 Operating current liabilities 72 Net operating working capital 73 Net plant & equipment 74 Total net operating capital $15,160.00 75 Net operating profit after taxes 76 Inv. in operating capital Free cash flow (FCF) 77 78 79 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%. 80 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 81 horizon value.) 82 83 Valuation 6/30/2019 6/30/2020 84 Horizon value 85 Value of operations 86 87 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? 88 See below for 89 calculations. 90 e. What is the projected intrinsic stock price on 7/1/2020 if JCI distributes the cash as dividends? See below for 91 calculations. 92 f. What is the projected intrinsic stock price on 7/1/2020 if JCI distributes the cash athrough stock repurchases? How many 93 shares will remain outstanding after the repurchase? See below for 94 calculations. 95 96 Distribute as Distribute as 97 Dividend Repurchase 98 6/30/2019 6/30/2020 7/1/2020 7/1/2020 Value of anarstiane Build a Model 00 A B D E F G H 80 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 31 horizon value.) 32 83 Valuation 6/30/2019 6/30/2020 84 Horizon value 85 Value of operations 36 37 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? 38 See below for 39 calculations. 90 e. What is the projected intrinsic stock price on 7/1/2020 if JCI distributes the cash as dividends? See below for 91 calculations. 92 f. What is the projected intrinsic stock price on 7/1/2020 if JCI distributes the cash athrough stock repurchases? How many 93 shares will remain outstanding after the repurchase? See below for 94 calculations. 25 26 Distribute as Distribute as 27 Dividend Repurchase 28 6/30/2019 6/30/2020 7/1/2020 7/1/2020 29 Value of operations 00 + Value of nonoperating assets 01 Total intrinsic value of firm 02 - Debt 03 Intrinsic value of equity 04 - Number of shares 05 Intrinsic price per share 06 07 08 09 10 11 12