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.

You have just learned that B&B 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 that there are still 10 million shares of stock outstanding.

(1.) 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)?

(2.) What is its estimated intrinsic value of equity on a price per share basis?

Your employer also is considering the acquistion of Hatfield Medical Supplies. You have gathered the following data regarding Hatfield, with all dollars reported in millions: (1) most recent sales of $2,000; (2) most recent total net operating capital, OpCap = $1,120; (3) most recent operating profitability ratio, OP = NOPAT/Sales = 4.5%; and (4) most recent capital requirement ratio, CR = OpCap/Sales = 56%. You estimate that the growth rate in sales from Year 0 to Year 1 will be 10%, from Year 1 to Year 2 will be 8%, from Year 2 to Year 3 will be 5%, and from Year 3 to Year 4 will be 5%. You also estimate that the long-term growth rate beyond Year 4 will be 5%. Assume the operating profitability and capital requirement ratios will not change. Use this information to forecast Hatfield's sales, net operating profit after taxes (NOPAT), OpCap, free cash flow, and return on invested capital (ROIC) for Years 1 through 4. Also estimate the annual growth in free cash flow for Years 2 through 4. The weighted average cost of capital (WACC) is 9%. How does the ROIC in Year 4 compare with the WACC?

What is the horizon value at Year 4? What is the total net operating capital at Year 0? How does the value of operations compare with the current total net operating capital?

o. 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?

p. 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.

(1.) What is the firms current stock price?

(2.) What is the stock's expected value 1 year from now?

(3.) What are the expected dividend yield, the capital gains yield, and the total return during the first year?

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

What is preferred stock? Suppose a share of preferred stock pays a dividend of $2.10 and investors require a return of 7%. What is the estimated value of the preferred stock?