Your employer, a mid-sized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporary heavy workloads. Your employer is also considering the purchase of a Biggerstaff & McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&Ms financial statements report marketable securities of $100 million, debt of $200 million, and preferred stock of $50 million. B&Ms weighted average cost of capital (WACC) is 11%. Answer the following questions.

1. Use B&Ms data and the free cash flow valuation model to answer the following questions. a. What is the estimated value of operations? b. What is the estimated total intrinsic value of the firm? c. What is the estimated intrinsic value of equity? d. What is the estimated intrinsic stock price?

2. You have just learned that B&M has undertaken a major expansion that will change its expected free cash flows to -$10 million in 1 year, $20 million in 2 years, and $35 million in 3 years. After 3 years, free cash flow will grow at a rate of 5%. No new debt or preferred stock were added, the investment was financed by equity from the owners. Assume the WACC is unchanged at 11% and it that there are still has 10 million shares of stock outstanding. a. What is its horizon value (i.e., its value of operations at year three)? What is its current value of operations (i.e., at time zero)? b. What is its value of equity on a price per share basis?

3. If B&M undertakes the expansion, what percent of B&Ms value of operations at Year 0 is due to cash flows from Years 4 and beyond? Hint: use the horizon value at t = 3 to help answer this question.

4. Assume that Temp Force has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 7.0%, and that the market risk premium is 5%. What is the required rate of return on the firms stock?

5. Assume that Temp Force is a constant growth company whose last dividend (D0, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 6% rate. a. What is the firms current stock price? b. What is the stocks expected value 1 year from now? c. What are the expected dividend yield, the capital gains yield, and the total return during the first year?

6. Now assume that the stock is currently selling at $30.29. What is its expected rate of return?

7. Now assume that Temp Forces dividend is expected to experience nonconstant growth of 30% from Year 0 to Year 1, 25% from Year 1 to Year 2, and 15% from Year 2 to Year 3. After Year 3, dividends will grow at a constant rate of 6%. What is the stocks intrinsic value under these conditions? What are the expected dividend yield and capital gains yield during the first year? What are the expected dividend yield and capital gains yield during the fourth year (from Year 3 to Year 4)?