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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&B’s financial statements report marketable securities of $100 million, debt of $200 million, and preferred stock of $50 million. B&B’s 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 firm’s 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 firm’s current estimated intrinsic stock price? (2) What is the stock’s 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?e. Suppose Temp Force’s stock price is selling for $30.29. Is the stock price based more on long-term or short-term expectations? Answer this by finding the percentage of Temp Force’s current stock price that is based on dividends expected during Years 1, 2, and 3. 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%? g. Now assume that the stock is currently selling at $30.29. What is its expected rate of return? h. Nowassume that Temp Force’s dividend is expected to experience nonconstant growth of 30%fromYear0 to Year1, 25%fromYear1 to Year2, and 15% from Year2 to Year3. After Year 3, dividends will grow at a constant rate of 6%. What is the stock’sintrinsicvalue undertheseconditions?Whataretheexpecteddividendyieldandcapitalgainsyieldduringthe first year? What are the expected dividend yield and capital gains yield during the fourth year (from Year 3 to Year 4)? i. What is free cash flow (FCF)? What is the weighted average cost of capital? What is the free cash flow valuation model? j. Use a pie chart to illustrate the sources that comprise a hypothetical company’s total value. Using another pie chart, show the claims on a company’s value. How is equity a residual claim? k. Use B&B’s 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? l. You have just learned that B&B has undertaken a major expansion that will change its expected free cash flows to -$10 million in 1 year, $20 million in 2 years, and $35 million in 3 years. After 3 years, free cash flow will grow at a rate of 5%. No new debt or preferred stock was added; the investment was financed by equity from the owners. Assume the WACC is unchanged at 11% and that there are still 10 million shares of stock outstanding. (1) What is the company’s horizon value (i.e., its value of operations at Year 3)? What is its current value of operations (i.e., at Time 0)? (2) What is its estimated intrinsic value of equity on a price-per-share basis? m. Compare and contrast the free cash flow valuation model and the dividend growth model. n. What is market multiple analysis? o. Whatis preferred stock? Suppose a share of preferred stock pays a dividend of $2.10 and investors require a return of 7%. What is the estimated value of the preferred stock?