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Week 3 Case Study

Temp Force is an employment agency that supplies temporary workers. The employer is considering acquiring Temp Force. Temp Force pays a dividend of $2 per share that is expected to grow at 6% indefinitely. Biggerstaff & Biggerstaff is a privately held company owned by two brothers. It has $24 million in free cash flow that is expected to grow at 5% indefinitely. It has $100 million in marketable securities, $200 million in debt, and $50 million in preferred stock. Its WACC is 11%.

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593 views

Week 3 Case Study

Temp Force is an employment agency that supplies temporary workers. The employer is considering acquiring Temp Force. Temp Force pays a dividend of $2 per share that is expected to grow at 6% indefinitely. Biggerstaff & Biggerstaff is a privately held company owned by two brothers. It has $24 million in free cash flow that is expected to grow at 5% indefinitely. It has $100 million in marketable securities, $200 million in debt, and $50 million in preferred stock. Its WACC is 11%.

Uploaded by

ShaoPuYu
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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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 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 & Biggerstaff (B&B), a privately held company owned by
two
brothers, each with 5 million shares of stock. B&B currently has free cash flow of
$24
million, which is expected to grow at a constant rate of 5%. B&Bs financial
statements
report 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
dividend
pattern.
(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
stocks
have 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
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?
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 grow

indefinitely 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 the
expected total return during the first year?
f. Why are stock prices volatile? Using Temp Force as an example, what is the
impact on
the estimated stock price if g falls to 5% or rises to 7%? If rs changes to 12%% or to
14%?

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?

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