Week 3 Case Study
Case Study____________________________________________Case:Mini
Case - Temp Force, page 322 of the text (end of Chapter 7). Respond
to Questions a, c, d(1), f, and k(1, 2, 3, 4).Your employer, a
mid-sized human resources management company, is
consideringexpansion into related fields, including the acquisition
of Temp Force Company, anemployment agency that supplies word
processor operators and computer programmersto businesses with
temporary heavy workloads. Your employer is also considering
thepurchase of a Biggerstaff & Biggerstaff (B&B), a
privately held company owned by twobrothers, each with 5 million
shares of stock. B&B currently has free cash flow of
$24million, which is expected to grow at a constant rate of 5%.
B&Bs financial statementsreport marketable securities of $100
million, debt of $200 million, and preferred stock of$50 million.
B&Bs WACC is 11%. Answer the following questions.
a. Describe briefly the legal rights and privileges of common
stockholders.b. (1) Write out a formula that can be used to value
any stock, regardless of its dividendpattern.(2) What is a constant
growth stock? How are constant growth stocks valued?(3) What
happens if a company has a constant g that exceeds its rs? Will
many stockshave expected g > rs in the short run (i.e., for the
next few years)? In the long run(i.e., forever)?c. Assume that Temp
Force has a beta coefficient of 1.2, that the risk-free rate (the
yieldon T-bonds) is 7.0%, and that the market risk premium is 5%.
What is the requiredrate of return on the firms stock?d. 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 growindefinitely at a 6% rate.(1) What is the firms
current estimated intrinsic stock price?(2) What is the stocks
expected value 1 year from now?(3) What are the expected dividend
yield, the expected capital gains yield, and theexpected total
return during the first year?
f. Why are stock prices volatile? Using Temp Force as an
example, what is the impact onthe estimated stock price if g falls
to 5% or rises to 7%? If rs changes to 12%% or to14%?
k. Use B&Bs data and the free cash flow valuation model to
answer the following questions.(1) What is its estimated value of
operations?(2) What is its estimated total corporate value?(3) What
is its estimated intrinsic value of equity?(4) What is its
estimated intrinsic stock price per share?
