CHAPTER 7 Stock Valuation 341
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Shoe Division’s estimated free cash flow each year from 2004 through 2007 is
given in the accompanying table. Beyond 2007 to infinity, the firm expects its
free cash flow to grow at 4% annually.
a. Use the free cash flow valuation modelto estimate the value of Erwin’s
Active Shoe Division.
b. Use your finding in part aalong with the data provided above to find this
division’s common stock value.
c. If the Active Shoe Division as a public company will have 500,000 shares
outstanding, use your finding in part bto calculate its value per share.
PROBLEMS
7–1 Authorized and available shares Aspin Corporation’s charter authorizes
issuance of 2,000,000 shares of common stock. Currently, 1,400,000 shares are
outstanding and 100,000 shares are being held as treasury stock. The firm
wishes to raise $48,000,000 for a plant expansion. Discussions with its invest-
ment bankers indicate that the sale of new common stock will net the firm $60
per share.
a. What is the maximum number of new shares of common stock that the firm
can sell without receiving further authorization from shareholders?
b. Judging on the basis of the data given and your finding in part a,will the firm
be able to raise the needed funds without receiving further authorization?
c. What must the firm do to obtain authorization to issue more than the num-
ber of shares found in part a?
7–2 Preferred dividends Slater Lamp Manufacturing has an outstanding issue of
preferred stock with an $80 par value and an 11% annual dividend.
a. What is the annual dollar dividend? If it is paid quarterly, how much will be
paid each quarter?
b. If the preferred stock isnoncumulativeand the board of directors has
passed the preferred dividend for the last 3 quarters, how much must be
paid to preferred stockholders before dividends are paid to common
stockholders?
c. If the preferred stock is cumulativeand the board of directors has passed the
preferred dividend for the last 3 quarters, how much must be paid to pre-
ferred stockholders before dividends are paid to common stockholders?
7–3 Preferred dividends In each case in the following table, how many dollars of
preferred dividends per share must be paid to preferred stockholders before com-
mon stock dividends are paid?
Year (t) Free cash flow (FCFt)
2004 $ 800,000
2005 1,200,000
2006 1,400,000
2007 1,500,000