Financial Valuation and Ethical Considerations in Corporate Expansion
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&M’s financial statements
report short-term investments of $100 million, debt of $200 million, and preferred stock
of $50 million. B&M’s weighted average cost of capital (WACC) is 11%. Answer the
following questions:
Part 1: Using complete sentences and academic vocabulary, please answer questions a
through d.
Part 2: Using the mini case information, write a 250-500-word report presenting potential
ethical issues that may arise from expanding into other related fields. In your discussion,
proactively strategize about possible expansion by explaining opportunities to promote
ethical standards within your organization.
a. Describe briefly the legal rights and privileges of common stockholders.
b. What is free cash flow (FCF)? What is the weighted average cost of capital? What is
the free cash flow valuation model?
c. 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?
d. Suppose the free cash flow at Time 1 is expected to grow at a constant rate forever.
What is a formula for the present value of expected free cash flows when discounted at
the WACC? If the most recent free cash flow is expected to grow at a constant rate
forever, what is a formula for the present value of expected free cash flows when
discounted at the WACC?
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&M’s financial statements
report short-term investments of $100 million, debt of $200 million, and preferred stock
of $50 million. B&M’s weighted average cost of capital (WACC) is 11%. Answer the
following questions:
Part 1: Using complete sentences and academic vocabulary, please answer questions a
through d.
Part 2: Using the mini case information, write a 250-500-word report presenting potential
ethical issues that may arise from expanding into other related fields. In your discussion,
proactively strategize about possible expansion by explaining opportunities to promote
ethical standards within your organization.
a. Describe briefly the legal rights and privileges of common stockholders.
b. What is free cash flow (FCF)? What is the weighted average cost of capital? What is
the free cash flow valuation model?
c. 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?
d. Suppose the free cash flow at Time 1 is expected to grow at a constant rate forever.
What is a formula for the present value of expected free cash flows when discounted at
the WACC? If the most recent free cash flow is expected to grow at a constant rate
forever, what is a formula for the present value of expected free cash flows when
discounted at the WACC?
