Mini Case
Your employer, a midsized 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
temporarily heavy workloads. Your employer is also considering the purchase of 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&Màfinancial statements report short-term investments of $100 million, debt of
$200 million, and preferred stock of $50 million. B&Màweighted average cost of capital
(WACC) is 11%. Answer the following questions:
Describe briefly the legal rights and privileges of common stockholders.
What is free cash flow (FCF)? What is the weighted average cost of capital? What is the free
cash flow valuation model?
Use a pie chart to illustrate the sources that comprise a hypothetical companyàtotal value.
Using another pie chart, show the claims on a companyàvalue. How is equity a residual claim?
Suppose the free cash flow at Time 1 is expected to grow at a constant rate of gL forever. If
gL
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