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					                                          Chapter 17. Student Ch 17-13 Build a Model


J. Clark Inc. (JCI), a manufacturer and distributer of sports equipment, has grown until it has become a stable, mature c
JCI is planning its first distribution to shareholders. Shown below are the most recent year's financial statements and p
the next year, 2013 (JCI has a fiscal year ending on June 30). JCI plans to liquidate $500 million of its short-term securi
distribute them on July 1, 2013, the first day of the next fiscal year, but has not yet decided whether to distribute with di
with stock repurchases.

Inputs
Amount of distribution                                  $500
Tax rate                                                  40%
WACC                                                   11.0%
Number of shares                                       1,000
FCF constant growth rate                                 6.0%

                                                      Actual       Projected
Income Statement (Millions of Dollars)             6/30/2012        6/30/2013
Net Sales                                        $20,000.00       $21,200.00
Costs (except depreciation)                      $16,000.00       $16,960.00
Depreciation                                      $1,300.00        $1,378.00
Earning before int. & tax                          $2,700.00       $2,862.00
Interest expense                                     $150.00         $152.82
Earnings before taxes                              $2,550.00       $2,709.18
Taxes                                              $1,020.00       $1,083.67
                                Net income         $1,530.00       $1,625.51


a. Assume first that JCI distributes the $500 million as dividends. Fill in the missing values in the balance sheet
column for July 1, 2013, that is labeled "Distribute as Dividends." (Hint: Be sure that the balance sheets balance after
you fill in the missing items. Also, assume JCI did not have to establish an account for dividends payable prior to the
distribution.)
         See below for calculations.
b. Now assume that JCI distributes the $500 million through stock repurchases. Fill in the missing values in the
balance sheet column for July 1, 2013, that is labeled "Distribute as Repurchase." (Hint: Be sure that the balance
sheets balance after you fill in the missing items.)

                                                                Projected:
                                                                  Prior to            Distribute as
Balance Sheets (Millions of Dollars)                  Actual    Distribution            Dividend
Assets                                             6/30/2012        6/30/2013              7/1/2013
Cash                                                $160.00          $169.60               $169.60
Short-term investments                              $200.00          $640.00
Accounts receivable                               $2,000.00        $2,120.00             $2,120.00
Inventories                                       $3,000.00        $3,180.00             $3,180.00
                      Total current assets        $5,360.00        $6,109.60             $5,469.60
Net plant and equipment                          $13,000.00       $13,780.00            $13,780.00
                              Total assets       $18,360.00       $19,889.60            $19,249.60
Liabilities & Equity
Accounts payable                                   $1,000.00        $1,060.00          $1,060.00
Accruals                                           $2,000.00        $2,120.00          $2,120.00
Short-term debt                                      $400.00            $0.00              $0.00

                      Total current liabilities    $3,400.00        $3,180.00          $3,180.00
Long-term debt                                     $2,068.18        $2,192.27          $2,192.27
                              Total liabilities    $5,468.18        $5,372.27          $5,372.27
Common stock                                       $5,851.82        $5,851.82          $5,851.82
Treasury stock                                      ($400.00)        ($400.00)
Retained earnings                                  $7,440.00        $9,065.51
                      Total common equity         $12,891.82       $14,517.33         $5,851.82
                    Total liabilities & equity    $18,360.00       $19,889.60        $11,224.09
                                                                                       NOT
                          Check for balance:                                        BALANCED!

c. Caculate JCI's projected free cash flow; the tax rate is 40%.

                                                                Projected
Calculation of Free Cash Flow                      6/30/2012    6/30/2013
Operating current assets                           $5,160.00
Operating current liabilities                       3,000.00
Net operating working capital                      $2,160.00
Net plant & equipment                              13,000.00
Total net operating capital                       $15,160.00
Net operating profit after taxes                   $1,620.00
Inv. in operating capital
Free cash flow (FCF)

c. Caculate JCI's horizon value for 6/30/2013. FCF is expected to grow at a constant rate of 6% and JCI's WACC is 11%
Calculate JCI's value of operations for 6/30/2012 and 6/30/2013. (Hint: JCI's value of operations on 6/30/2013 is equal to
the horizon value.)

Valuation                                          6/30/2012    6/30/2013
Horizon value
Value of operations

d. What is JCI's current intrinsic stock price (the price on 6/30/2012)? What is the projected intrinsic stock price for
6/30/2013?
       See below for calculations.
e. What is the projected intrinsic stock price on 7/1/2013 if JCI distributes the cash as dividends?
       See below for calculations.
f. What is the projected intrinsic stock price on 7/1/2013 if JCI distributes the cash athrough stock repurchases? How
many shares will remain outstanding after the repurchase?
       See below for calculations.

                                                                                    Distribute as
                                                                                      Dividend
                                                   6/30/2012    6/30/2013             7/1/2013
                         Value of operations
           + Value of nonoperating assets
Total intrinsic value of firm
                      − Debt
   Intrinsic value of equity
        ÷ Number of shares
   Intrinsic price per share
                              2/1/2012




ecome a stable, mature company. Now
nancial statements and projections for
n of its short-term securities and
ether to distribute with dividends or




 the balance sheet
ce sheets balance after
 ds payable prior to the


ssing values in the
re that the balance




             Distribute as
             Repurchase
                  7/2/2013
                  $169.60

                $2,120.00
                $3,180.00
                $5,469.60
               $13,780.00
               $19,249.60
                 $1,060.00
                 $2,120.00
                     $0.00

                 $3,180.00
                 $2,192.27
                 $5,372.27
                 $5,851.82


                $5,851.82
               $11,224.09
                 NOT
              BALANCED!




% and JCI's WACC is 11%.
 on 6/30/2013 is equal to




 trinsic stock price for


 ds?

 tock repurchases? How




              Distribute as
              Repurchase
                   7/1/2013

				
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