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Bayani Bakery's most recent FCF was \$48 million; the FCF is expected to grow at a constant rate of 6%. The firm's WACC is 12% and it has 15 million shares of common stock outstanding. The firm has \$30 million in short-term investments, which it plans to
liquidate and distribute to common shareholders via a stock repurchase; the firm has no other nonoperating assets. It has \$368 million in debt and \$60 million in preferred stock.

a. What is the value of operations?
b. Immediately prior to the repurchase, what is the intrinsic value of equity?
c. Immediately prior to the repurchase, what is the instrinsic stock price?
d. How many shares will be repurchased? How many shares will remain after the
repurchase?
e. Immediately after the repurchase, what is the intrinsic value of the equity? The
intrinsic stock price?

Solution Preview

(a) Value of Operations = Free Cash Flows * (1 + growth rate) / (WACC - growth rate)

Value of operations = 48*(1+6%)/(12% - 6%) = 48*1.06/0.06 = 50.88/0.06 = \$848 ...

Solution Summary

The solution computes the value of operations, immediately prior to the repurchase, what is the intrinsic value of equity, Immediately prior to the repurchase, what is the instrinsic stock price, How many shares will be repurchased? How many shares will remain after the repurchase, Immediately after the repurchase, what is the intrinsic value of the equity?

\$2.49