J. Clark Inc. (JCI), a manufacturer and distributer of sports equipment, has grown until it has become a
Question # 00091223
Posted By:
Updated on: 08/11/2015 06:30 AM Due on: 12/30/2015
J. Clark Inc. (JCI), a manufacturer and distributer of sports equipment, has grown until it has become a stable, mature company.
Now JCI is planning its first distribution to shareholders. Shown below are the most recent year's financial statements and
projections for the next year, 2016 (JCI has a fiscal year ending on June 30). JCI plans to liquidate $500 million of its short-term
securities and distribute them on July 1, 2016, the first day of the next fiscal year, but has not yet decided whether to distribute
with dividends or with stock repurchases.
Inputs
Amount of distribution
Tax rate
WACC
Number of shares
FCF constant growth rate
Income Statement (Millions of Dollars)
Net Sales
Costs (except depreciation)
Depreciation
Earning before int. & tax
Interest expense
Earnings before taxes
Taxes
Net income
$500
40%
11.0%
1,000
6.0%
Actual
6/30/2015
$20,000.00
$16,000.00
$1,300.00
$2,700.00
$150.00
$2,550.00
$1,020.00
Projected
6/30/2016
$21,200.00
$16,960.00
$1,378.00
$2,862.00
$152.82
$2,709.18
$1,083.67
$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, 2016, 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, 2016, that is labeled "Distribute as Repurchase." (Hint: Be sure that the balance
sheets balance after you fill in the missing items.)
Balance Sheets (Millions of Dollars)
Assets
Cash
Short-term investments
Accounts receivable
Inventories
l current assets
Net plant and equipment
Total assets
Liabilities & Equity
Accounts payable
Accruals
Short-term debt
Actual
6/30/2015
$160.00
$200.00
$2,000.00
$3,000.00
$5,360.00
$13,000.00
$18,360.00
Projected:
Prior to
Distribution
6/30/2016
$169.60
$640.00
$2,120.00
$3,180.00
$6,109.60
$13,780.00
$19,889.60
$1,000.00
$2,000.00
$400.00
rrent liabilities
Long-term debt
Total liabilities
Common stock
Treasury stock
Retained earnings
common equity
bilities & equity
$3,400.00
$2,068.18
$5,468.18
$5,851.82
($400.00)
$7,440.00
$12,891.82
$18,360.00
Distribute as
Dividend
7/1/2016
$169.60
Distribute as
Repurchase
7/2/2016
$169.60
$2,120.00
$3,180.00
$5,469.60
$13,780.00
$19,249.60
$2,120.00
$3,180.00
$5,469.60
$13,780.00
$19,249.60
$1,060.00
$2,120.00
$0.00
$1,060.00
$2,120.00
$0.00
$1,060.00
$2,120.00
$0.00
$3,180.00
$2,192.27
$5,372.27
$5,851.82
($400.00)
$9,065.51
$14,517.33
$19,889.60
$3,180.00
$2,192.27
$5,372.27
$5,851.82
$3,180.00
$2,192.27
$5,372.27
$5,851.82
$5,851.82
$11,224.09
$5,851.82
$11,224.09
NOT
BALANCED!
NOT
BALANCED!
ck for balance:
c. Caculate JCI's projected free cash flow; the tax rate is 40%.
Projected
Calculation of
Free Cash
Flow
Operating current assets
Operating current liabilities
Net operating working capital
Net plant & equipment
Total net operating capital
Net operating profit after taxes
Inv. in operating capital
6/30/2015
$5,160.00
3,000.00
$2,160.00
13,000.00
$15,160.00
$1,620.00
6/30/2016
Free cash flow (FCF)
c. Caculate JCI's horizon value for 6/30/2016. FCF is expected to grow at a constant rate of 6% and JCI's WACC is
11%. Calculate JCI's value of operations for 6/30/2015 and 6/30/2016. (Hint: JCI's value of operations on 6/30/2016 is
equal to the horizon value.)
Valuation
Horizon value
Value of operations
6/30/2015
6/30/2016
d. What is JCI's current intrinsic stock price (the price on 6/30/2015)? What is the projected intrinsic stock price for
6/30/2016?
See below for
calculations.
e. What is the projected intrinsic stock price on 7/1/2016 if JCI distributes the cash as dividends?
See below for
calculations.
f. What is the projected intrinsic stock price on 7/1/2016 if JCI distributes the cash athrough stock repurchases?
How many shares will remain outstanding after the repurchase?
See below for
calculations.
6/30/2015
Value of operations
+ Value of nonoperating assets
Total intrinsic value of firm
Debt
Intrinsic value of equity
รท Number of shares
Intrinsic price per share
6/30/2016
Distribute as
Dividend
7/1/2016
Distribute as
Repurchase
7/1/2016
Now JCI is planning its first distribution to shareholders. Shown below are the most recent year's financial statements and
projections for the next year, 2016 (JCI has a fiscal year ending on June 30). JCI plans to liquidate $500 million of its short-term
securities and distribute them on July 1, 2016, the first day of the next fiscal year, but has not yet decided whether to distribute
with dividends or with stock repurchases.
Inputs
Amount of distribution
Tax rate
WACC
Number of shares
FCF constant growth rate
Income Statement (Millions of Dollars)
Net Sales
Costs (except depreciation)
Depreciation
Earning before int. & tax
Interest expense
Earnings before taxes
Taxes
Net income
$500
40%
11.0%
1,000
6.0%
Actual
6/30/2015
$20,000.00
$16,000.00
$1,300.00
$2,700.00
$150.00
$2,550.00
$1,020.00
Projected
6/30/2016
$21,200.00
$16,960.00
$1,378.00
$2,862.00
$152.82
$2,709.18
$1,083.67
$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, 2016, 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, 2016, that is labeled "Distribute as Repurchase." (Hint: Be sure that the balance
sheets balance after you fill in the missing items.)
Balance Sheets (Millions of Dollars)
Assets
Cash
Short-term investments
Accounts receivable
Inventories
l current assets
Net plant and equipment
Total assets
Liabilities & Equity
Accounts payable
Accruals
Short-term debt
Actual
6/30/2015
$160.00
$200.00
$2,000.00
$3,000.00
$5,360.00
$13,000.00
$18,360.00
Projected:
Prior to
Distribution
6/30/2016
$169.60
$640.00
$2,120.00
$3,180.00
$6,109.60
$13,780.00
$19,889.60
$1,000.00
$2,000.00
$400.00
rrent liabilities
Long-term debt
Total liabilities
Common stock
Treasury stock
Retained earnings
common equity
bilities & equity
$3,400.00
$2,068.18
$5,468.18
$5,851.82
($400.00)
$7,440.00
$12,891.82
$18,360.00
Distribute as
Dividend
7/1/2016
$169.60
Distribute as
Repurchase
7/2/2016
$169.60
$2,120.00
$3,180.00
$5,469.60
$13,780.00
$19,249.60
$2,120.00
$3,180.00
$5,469.60
$13,780.00
$19,249.60
$1,060.00
$2,120.00
$0.00
$1,060.00
$2,120.00
$0.00
$1,060.00
$2,120.00
$0.00
$3,180.00
$2,192.27
$5,372.27
$5,851.82
($400.00)
$9,065.51
$14,517.33
$19,889.60
$3,180.00
$2,192.27
$5,372.27
$5,851.82
$3,180.00
$2,192.27
$5,372.27
$5,851.82
$5,851.82
$11,224.09
$5,851.82
$11,224.09
NOT
BALANCED!
NOT
BALANCED!
ck for balance:
c. Caculate JCI's projected free cash flow; the tax rate is 40%.
Projected
Calculation of
Free Cash
Flow
Operating current assets
Operating current liabilities
Net operating working capital
Net plant & equipment
Total net operating capital
Net operating profit after taxes
Inv. in operating capital
6/30/2015
$5,160.00
3,000.00
$2,160.00
13,000.00
$15,160.00
$1,620.00
6/30/2016
Free cash flow (FCF)
c. Caculate JCI's horizon value for 6/30/2016. FCF is expected to grow at a constant rate of 6% and JCI's WACC is
11%. Calculate JCI's value of operations for 6/30/2015 and 6/30/2016. (Hint: JCI's value of operations on 6/30/2016 is
equal to the horizon value.)
Valuation
Horizon value
Value of operations
6/30/2015
6/30/2016
d. What is JCI's current intrinsic stock price (the price on 6/30/2015)? What is the projected intrinsic stock price for
6/30/2016?
See below for
calculations.
e. What is the projected intrinsic stock price on 7/1/2016 if JCI distributes the cash as dividends?
See below for
calculations.
f. What is the projected intrinsic stock price on 7/1/2016 if JCI distributes the cash athrough stock repurchases?
How many shares will remain outstanding after the repurchase?
See below for
calculations.
6/30/2015
Value of operations
+ Value of nonoperating assets
Total intrinsic value of firm
Debt
Intrinsic value of equity
รท Number of shares
Intrinsic price per share
6/30/2016
Distribute as
Dividend
7/1/2016
Distribute as
Repurchase
7/1/2016
-
Rating:
/5
Solution: J. Clark Inc. (JCI), a manufacturer and distributer of sports equipment, has grown until it has become a