Principles of Managerial Finance

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