MINICASE 4 (1)

MINICASE 4The purpose of this assignment is to explain core concepts related to stocks and to analyze the ethical implications of decisions and promote ethical standards within organizations.

Read the Chapter 7 Mini Case on pages 322-323 in Financial Management: Theory and Practice. Using complete sentences and academic vocabulary, please answer questions a through d.

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?

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.

This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.

100.0 %Content  

15.0 %Question A Answer to question A is extremely thorough and supported with substantial relevant details. 15.0 %Question B Answer to question B is extremely thorough and supported with substantial relevant details. 15.0 %Question C Answer to question C is extremely thorough and supported with substantial relevant details. 15.0 %Question D Answer to question D is extremely thorough and supported with substantial relevant details. 30.0 %Ethical Issues and Standards (C. 4.2) Report discussing potential ethical issues that may arise from expansion and opportunities to promote ethical standards within the organization is extremely thorough and includes substantial supporting details and examples. 10.0 %Mechanics of Writing (includes spelling, punctuation, grammar, language use) Writer is clearly in command of standard, written, academic English.