2、Chan Mei Yee Case Scenario
Chan Mei Yee is valuing McLaughlin Corporation common shares using a free cash flow approach. She assembled information about McLaughlin from several sources. She begins her analysis by estimating free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) for the 2007 fiscal year, using the financial statements in Exhibits 1 and 2 and other financial information contained in Exhibit 3. McLaughlin’s fiscal year ends 31 December.
Chan plans to perform two different valuations of McLaughlin, which she calls the "base case" valuation and the "alternative" valuation. Critical assumptions for each are given below and in Exhibit 3.
Base case valuation
· 2008 FCFF will be $600 million.
· FCFF will grow forever at 4% annually.
· The market value and book value of McLaughlin’s long-term debt are approximately equal.
Alternative valuation
· 2008 earnings per share (EPS) will be $1.80.
· EPS will grow forever at 6% annually.
· For 2008 and beyond:
- Net capital expenditures (fixed capital expenditures minus depreciation) will be 30% of EPS.
- Investments in working capital will be 10% of EPS.
- 60% of future investments will be financed with equity and 40% will be financed with debt.
Chan is also concerned about the effects on McLaughlin’s 2008 FCFE of the following three possible financial actions by McLaughlin during the year 2008:
· Increasing common stock cash dividends by $110 million.
· Repurchasing $60 million of common shares.
· Reducing its outstanding long-term debt by $100 million.
Melissa Nicosia, Chan’s supervisor, reviews the McLaughlin valuations. Nicosia states that the free cash flow valuation approach is superior to the discounted dividend valuation approach because the company’s dividends have been substantially different from its FCFE. Nicosia also states that because the company’s capital structure seems unstable, the FCFE valuation approach is superior to the FCFF valuation approach.
Exhibit 1
McLaughlin Corporation
Selected Financial Data
(millions, except per share amounts)
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For Year Ending 31 December
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2007
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Revenues
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$ 6,456
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Cost of goods sold
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3,363
|
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Selling, general, and administrative expense
|
1,744
|
|
Earnings before interest, taxes, depreciation, and amortization (EBITDA
|
1,349
|
|
Depreciation expense
|
243
|
|
Operating income
|
1,106
|
|
Interest expense
|
186
|
|
Pretax income
|
920
|
|
Income tax
|
294
|
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Net income
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$ 626
|
|
|
|
|
Number of outstanding shares (millions)
|
411
|
|
2007 Earnings per share
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$ 1.52
|
|
2007 Dividends paid (millions)
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$ 148
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2007 Dividends per share
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$ 0.36
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2007 Fixed capital expenditures (millions)
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$ 535
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Exhibit 2
McLaughlin Corporation
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Consolidated Balance Sheets (millions)
At 31 December
|
2007
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2006
|
|
Cash and cash equivalents
|
$ 32
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$ 21
|
|
Accounts receivable
|
413
|
417
|
|
Inventories
|
709
|
638
|
|
Other current assets
|
136
|
123
|
|
Total current assets
|
1,290
|
1,199
|
|
Long-term assets, net
|
4,814
|
4,522
|
|
Total assets
|
$6,104
|
$5,721
|
|
|
|
|
|
Current liabilities
|
$2,783
|
$2,678
|
|
Long-term debt
|
2,249
|
2,449
|
|
Common stockholders’ equity
|
1,072
|
594
|
|
Total liabilities and stockholders’ equity
|
$6,104
|
$5,721
|
Exhibit 3
Other Current Financial Information for McLaughlin Corp.
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Effective tax rate
|
32.0%
|
|
Cost of equity
|
12.0%
|
|
Weighted average cost of capital
|
9.0%
|
|
Non-operating assets
|
$ 0
|
Question 1
McLaughlin's FCFF for 2007 was closest to:
A. $460 million.
B. $474 million.
C. $485 million.
D. $545 million.
Question 2
McLaughlin's 2007 FCFE was less than its 2007 FCFF by an amount closest to:
A. $74 million.
B. $126 million.
C. $326 million.
D. $386 million.
Question 3
Using Chan's base case valuation assumptions and the FCFF valuation approach, the year-end 2007 value per share of McLaughlin common stock should be closest to:
A. $18.25.
B. $23.73.
C. $24.89.
D. $29.20.
发表于 2011-6-3 05:25
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