Company Information:

Number of outstanding shares = 5,000,000 Free Cash Flow (FCF) = $24,000,000 Expected growth rate = 5%

Short-term investments =$100,000,000 Debt =$200,000,000 Preferred Stock=$50,000,000 WACC =11%

Answer the following questions:

You have just learned that B&M has undertaken a major expansion that will change its expected free cash flows to -$10 million in 1 year, $20 million in 2 years, and $35 million in 3 years. After 3 years, free cash flow will grow at a rate of 5%. No new debt or preferred stock was added; the investment was financed by equity from the owners. Assume the WACC is unchanged at 11% and that there are still 10 million shares of stock outstanding.

a. What is the company’s horizon value (value of operations at yr 3)? What is its current value of operations (at time 0)?

b. What is its estimated intrinsic value of equity on a price-per-share basis?

c. If B&M undertakes the expansion, what percent of B&M’s value of operations at year 0 is due to cash flows from year 4 & beyond?

d. Based on your answer to the previous question, what are two reasons why managers often emphasize short-term earnings?