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Case: Mini Case - Temp Force, Respond to Questions a, b, d, ande (1, 2, 3, 4).
Your employer, a midsized human resources management company, isconsidering expansion into related fields, including theacquisition of Temp Force Company, an employment agency thatsupplies word processor operators and computer programmers tobusinesses with temporarily heavy workloads. Your employer is alsoconsidering the purchase of Biggerstaff & McDonald (B&M), aprivately held company owned by two friends, each with 5 millionshares of stock. B&M currently has free cash flow of $24million, which is expected to grow at a constant rate of 5%.B&M’s financial state-ments report short-term investments of$100 million, debt of $200 million, and preferred stock of $50million. B&M’s weighted average cost of capital (WACC) is 11%.Answer the following questions:
a. Describe briefly the legal rights and privileges of commonstockholders.
b. What is free cash flow (FCF)? What is the weighted averagecost of capital? What is the free cash flow valuation model?
c. Use a pie chart to illustrate the sources that comprise ahypothetical company’s total value. Using another pie chart, showthe claims on a company’s value. How is equity a residualclaim?
d. Suppose the free cash flow at Time 1 is expected to grow at aconstant rate of gL forever. If gL cash flows when discounted atthe WACC? If the most recent free cash flow is expected to grow ata constant rate of gL , WACC), what is a formula for the presentvalue of expected free cash flows when discounted at the WACC?
e. Use B&M’s data and the free cash flow valuation model toanswer the following questions:
(1) What is its estimated value of operations?
(2) What is its estimated total corporate value? (This is theentity value.)
(3) What is its estimated intrinsic value of equity?
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