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Unformatted text preview: VD [Eq. 7.8] CHAPTER 7 Stock Valuation 341 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.
Year (t) Free cash flow (FCFt) 2004 $ 800,000 2005 1,200,000 2006 1,400,000 2007 1,500,000 a. Use the free cash flow valuation model to estimate the value of Erwin’s
Active Shoe Division.
b. Use your finding in part a along 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 b to calculate its value per share. PROBLEMS
LG2 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 investment bankers indicate that the sale of new common stock will net the firm $60
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 number of shares found in part a? LG2 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 is noncumulative and 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
c. If the preferred stock is cumulative and 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? LG2 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 common stock dividends are paid? 342 PART 2 Important Financial Concepts Case Type Par value
$ 80 Dividend per
share per period
$5 Periods of
dividends passed A Cumulative B Noncumulative 110 C Noncumulative 100 D Cumulative 60 8.5% 4 E Cumulative 90 9% 0 8%
1 LG2 7–4 Convertible preferred stock Valerian Corp. convertible preferred stock has a
fixed conversion ratio of 5 common shares per 1 share of preferred stock. The
preferred stock pays a dividend of $10.00 per share per year. The common
stock currently sells for $20.00 per share and pays a dividend of $1.00 per share
a. Judging on the basis of the c...
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