Solution
Chapter:	14
Problem:	13
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, 2014 (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, 2014, 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		$500
									Tax rate		40%
WACC		11.0%
Number of shares		1,000
FCF constant growth rate		6.0%
		Actual	Projected
Income Statement (Millions of Dollars)		6/30/13	6/30/14
Net Sales		$20,000.00	$21,200.00
Costs (except depreciation)		$16,000.00	$16,960.00
Depreciation		$1,300.00	$1,378.00
Earning before int. & tax		$2,700.00	$2,862.00
Interest expense		$150.00	$152.82
Earnings before taxes		$2,550.00	$2,709.18
Taxes		$1,020.00	$1,083.67
Net income		$1,530.00	$1,625.51
a. Assume first that JCI distributes the $500 million as dividends. Fill in the missing values in the balance sheet column for July 1, 2014, 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, 2014, that is labeled "Distribute as Repurchase." (Hint: Be sure that the balance sheets balance after you fill in the missing items.)
			Projected: Prior to Distribution		Distribute as Dividend		Distribute as Repurchase
Balance Sheets (Millions of Dollars)		Actual
Assets		6/30/2013	6/30/2014		7/1/2014		7/2/2014
Cash		$160.00	$169.60		$169.60		$169.60
Short-term investments		$200.00	$640.00		????		????
Accounts receivable		$2,000.00	$2,120.00		$2,120.00		$2,120.00
Inventories		$3,000.00	$3,180.00		$3,180.00		$3,180.00
Total current assets		$5,360.00	$6,109.60		$5,469.60		$5,469.60
Net plant and equipment		$13,000.00	$13,780.00		$13,780.00		$13,780.00
Total assets		$18,360.00	$19,889.60		$19,249.60		$19,249.60
Liabilities & Equity
Accounts payable		$1,000.00	$1,060.00		$1,060.00		$1,060.00
Accruals		$2,000.00	$2,120.00		$2,120.00		$2,120.00
Short-term debt		$400.00	$0.00		$0.00		$0.00
Total current liabilities		$3,400.00	$3,180.00		$3,180.00		$3,180.00
Long-term debt		$2,068.18	$2,192.27		$2,192.27		$2,192.27
Total liabilities		$5,468.18	$5,372.27		$5,372.27		$5,372.27
Common stock		$5,851.82	$5,851.82		$5,851.82		$5,851.82
Treasury stock		($400.00)	($400.00)		????		????
Retained earnings		$7,440.00	$9,065.51		????		????
Total common equity		$12,891.82	$14,517.33		$5,851.82		$5,851.82
Total liabilities & equity		$18,360.00	$19,889.60		$11,224.09		$11,224.09
					NOT BALANCED!		NOT BALANCED!
Check for balance:
c. Caculate JCI's projected free cash flow; the tax rate is 40%.
			Projected
Calculation of Free Cash Flow		6/30/2013	6/30/2014
Operating current assets		$5,160.00	????
Operating current liabilities		3,000.00	????
Net operating working capital		$2,160.00	????
Net plant & equipment		13,000.00	????
Total net operating capital		$15,160.00	????
Net operating profit after taxes		$1,620.00	????
Inv. in operating capital			????
Free cash flow (FCF)			????
c. Caculate JCI's horizon value for 6/30/2014. FCF is expected to grow at a constant rate of 6% and JCI's WACC is 11%. Calculate JCI's value of operations for 6/30/2013 and 6/30/2014. (Hint: JCI's value of operations on 6/30/2014 is equal to the horizon value.)
Valuation		6/30/2013	6/30/2014
Horizon value			????
Value of operations		????	????
d. What is JCI's current intrinsic stock price (the price on 6/30/2013)? What is the projected intrinsic stock price for 6/30/2014?
See below for calculations.
e. What is the projected intrinsic stock price on 7/1/2014 if JCI distributes the cash as dividends?
See below for calculations.
f. What is the projected intrinsic stock price on 7/1/2014 if JCI distributes the cash athrough stock repurchases? How many shares will remain outstanding after the repurchase?
See below for calculations.
					Distribute as Dividend		Distribute as Repurchase
		6/30/2013	6/30/2014		7/1/2014		7/1/2014
	Value of operations	????	????		????		????
	+ Value of nonoperating assets	????	????		????		????
	Total intrinsic value of firm	????	????		????		????
	Debt	????	????		????		????
	Intrinsic value of equity	????	????		????		????
	Number of shares	????	????		????		????
	Intrinsic price per share	????	????		????		????