Questions and Answers of Equity Asset Valuation

Show Lemma 4.1.
Give a proof of Theorem 4.7 both for the one-period framework and the continuous-time framework.
Consider a one-period, three-state economy with two assets traded. Asset 1 has a price of 0.9 and pays a dividend of 1 no matter what state is realized. Asset 2 has a price of 2 and pays 1, 2, and 4
Imagine a one-period economy where the state-price deflator ζ is lognormally distributed with E[ln ζ ] = μζ and Var[ln ζ ] = σ 2ζ . What is the maximal Sharpe ratio of a risky asset? (Look at
In a one-period two-state economy the risk-free interest rate over the period is 25%. An asset that pays out 100 in state 1 and 200 in state 2 trades at a price of 110.(a) What is the no-arbitrage
Verify Eq. (3.5).
Imagine a one-period economy with two possible end-of-period states that are equally likely. Two assets are traded. Asset 1 has an initial price of 1 and pays off 1 in state 1 and 2 in state 2. Asset
Consider a one-period model with only two possible end-of-period states.Three assets are traded in an arbitrage-free market. Asset 1 is a risk-free asset with a price of 1 and an end-of-period
The dynamics of the continuous-time stochastic processes X = (Xt) and Y =(Yt) are given by dXt = Xt [μX dt + σX dz1t], dYt = μY dt + ρσY dz1t +'1 − ρ2σY dz2t, where z1 and z2 are independent
(Adapted from Björk (2009)) Define the process y = (yt) by yt = eazt , where a is a constant and z = (zt) is a standard Brownian motion. Find the dynamics of y. Show that yt = 1 +1 2a2 t0 ys ds + a
(Adapted from Björk (2009)) Define the process y = (yt) by yt = z4 t , where z = (zt) is a standard Brownian motion. Find the dynamics of y. Show that yt = 6 t0 z2 s ds + 4 t0 z3 s dzs.Show that
Suppose that the continuous-time stochastic process X = (Xt) is defined as Xt = 1 2t 0λ2 s ds +t 0λs dzs, where z = (zt) is a one-dimensional standard Brownian motion and λ = (λt) is some
Suppose X = (Xt)is a geometric Brownian motion, dXt = μXt dt + σXt dzt.What is the dynamics of the process y = (yt) defined by yt = (Xt)n?What can you say about the distribution of future values of
Let X = (Xt) and Y = (Yt) be the price processes of two assets with no intermediate dividends and assume that dXt = Xt [0.05 dt + 0.1 dz1t + 0.2 dz2t], dYt = Yt [0.07 dt + 0.3 dz1t − 0.1 dz2t].(a)
What are the advantages of a firm with publicly traded stock?
a. A firm's equity has a value of $604.Investors are taxed on ordinary income at .396 and on capital gains at .20. Assume that the firm's equity is purchased for $604. Instead of a $100 dividend the
A corporation has a market capitalization of $400,000,000 and annual cash flow of $100,000,000. There are 20,000,000 shares outstanding. Maintenance Cap-Ex is $10,000,000. The stock price is $20.If
How much debt did Metromedia issue on November 30, 1984?
Was the total outlay of $1,183,000,000 to the shareholders too high? Assume the stock was selling no higher than $35.75 before the offer. What value do you place on Metromedia's equity?
As a stockbroker would you tender your stock for an offer price of $40?
How was value added?
If you were structuring the bank debt or the replacement debt, what would you (the lender) change?
What was the value of Kluge's equity immediately before the LBO? Assume a stock value of $20.38 per share.
Assume a firm value of $1,228,000,000 after the LBO (before any sale of pieces). What was the value of Kluge's equity?
What is the maximum value KKR should bid assuming the $50 stock price accurately reflects the firm's value before the LBO competition starts?
What is the maximum amount of .12 debt (incremental) that RJR can support? What would be the effect of a higher interest rate?
How much did KKR pay for the common stock of RJR?
Did KKR overpay for RJR? Did KKR win or lose?
Using just the balance sheet, determine the value of the Marietta Corporation as of September 30, 1995. Assume Marietta debt yields .10 contractually and the current rate for equivalent risk debt is
As a stockholder, would you accept the $10.25 offer? Assume there are 3,621,000 shares outstanding and that the calculations are based on the information from the quarter ending December 30, 1995.
If you acquired Marietta, what would be your capital structure?What would be the value per share?
What should the management and Board of Directors have done, given the $11 offer?
What is happening to U.S. Can?
Who and what are the rollover stockholders?
What are the tax consequences of the transaction to the selling stockholders?
There is a one-time cash bonus of $1,182,700 for management.What do you think?
What percentage of equity will management own? What per centage of common equity?
If the total equity is $160 million after the recap, what is the value of management's investment? What was the value before the recap if management owned .54% of the equity?
How much were the total fees associated with the recapitaliza tion?
What was the stock price on the last trading day before the re cap announcement? What premium is being paid?
See the buying history. What do you think?
Assuming a market value of $15 per share and 13,442,000 shares what was the common stock's total value? With the earnings of $21,156,000 for 1999, what was P/E? What was the EPS?
The EBITDA for June 30, 2000 is $106.4 million. The ratio of market cap to EBITDA is what?
Which of the facts given in the case are relevant in determining your preference of offers? How is value created?
Assuming an initial $40 stock price, what was the value of the stock equity before the restructuring?
Estimate the stock price per share after the second offer is accepted, and after the buyout of Mesa and after the three-for-one split.
The answers to (2) and (3) implicitly make what assumptions?
How much value per share does a shareholder receive from the second offer?
Carl Icahn demanded:■ More preferred stock■ Larger common stock dividend■ A three for one stock split Of what economic significance are these changes?
If the first offer was worth $51.83 per share and the second offer was worth $52.39, what is the total value difference in the two offers?
Icahn and Pickens each received $25,000,000 to cover expenses.Is this ethical? Strategically sound?
Who won? Who lost?
Should Mr. Boeschenstein accept the Wickes offer?
What is the value of the $35 debenture (assume a .15 discount rate)?
Assume the initial stock price is $50 and there are 29,695,000 shares outstanding initially. There are 347,000 shares in the ESOP that will not be exchanged (they will receive a number of new
What is the value of the distribution to a shareholder if the in vestment banker's plan is accepted? Use the information from questions (2) and (3).
If the investment banker's plan is accepted what real things should OCF management then do?
How can management turn this negative event (a raid by Wickes)into a positive event?
If the firm guarantees that the ESOP will receive as much value as the shareholders receive who exchange, what will be the new stock price if the new stock equity value is $141,000,000 after the
Why are insurance companies more likely to buy preferred stock than individuals?
a. Assume the market capitalization of a firm's stock is $6,500,000 and there is $10,000,000 of debt outstanding. How much additional debt can be issued if the $6,500,000 is accepted as being
If equity investors contribute $1,000,000 and want a .30 return at time 4, how much do they require at time 4?
a. Assume an investor can earn .12 before investor tax and .07248 after investor tax. The tax rate on ordinary income is .396. If the corporation pays a $100 dividend, after 20 years the investor
What IRR does the investor earn with retention compared to an immediate cash dividend?
a. What is the value of a firm paying $100 dividend taxed at .396, with zero growth and a .07248 discount rate?b. Assume the $100 per year is reinvested for 20 years and the basic firm value of
Assume a $800 investment returns $1,000 at time 1 (a .25 return).What is the IRR on $100 of equity if $700 of .08 debt is used as well as equity?
a. Assume the value of a firm's equity is $1,000 and $800 of .10 debt is substituted for equity. The corporate tax rate is .35.What is the new value of the equity?What total wealth do the
a. Assume a firm with a value of $10,000 earns $1,000 EBIT. The tax rate is .35. An investor owning 100 percent of the equity earns how much?b. If the firm earning $1,000 EBIT is financed with .90
Change the cost of debt of problem 3b. to .10. Recompute the investor's return if the firm earns $2,000 EBIT.
A firm with a value of $1,000 and zero debt has a cost of capital of .12. Assume $900 of .08 debt is substituted for stock. The tax rate is .35. Estimate the new cost of capital.
Assume the value of an unlevered firm is $10,000,000. The tax rate is .35.What is the maximum amount of debt that can be issued in substitution for equity if the $10,000,000 is an accurate
a. Assume a one year investment of $10,000 returns $10,900 at time 1.What is the return on $1,000 of equity if $9,000 of .05 debt is used? Assume zero taxes.b. What is the IRR (after tax) on $1,000
a. The market capitalization of a firm with 100 percent stock equity is $10,000,000. Assume $8,000,000 of .10 debt is substituted for stock (the debt is given to the shareholders). The tax rate is
a. A firm is paying $8 per year dividend (the next dividend is in one year). There is zero growth. The tax rate on ordinary income is .396. The investor's after tax opportunity cost on comparable
A firm is earning $8 per year. It can earn .20 (after corporate tax) on reinvested funds. Based on a constant dividend the firm's value is $40.27. If the funds are reinvested the firm's value after
What are the advantages of private equity?
Of the eight factors listed by DeAngelo and DeAngelo, which one do you consider most important?
a. Assume the LBO management firm is paid 2 percent on Company B's total assets and 20 percent of the gross profits (before capital charges and after taxes). The capital structure for Company B
Which is a more reliable estimate of value, market capitalization or the present value of the firm's future cash flows?
The price-earnings multiplier for comparable firms is a popular method of valuation. When would this valuation method not be reliable?
In the chapter we have:If the firm has a low retention rate and a large growth rate what does this imply? Would you expect a high or low P/E ratio? P/E = (1-b) k-g
One can multiply a constant (multiplier) times a firm's EBITDA. Explain what one gets from the product.
Assume the value of a firm is: The firm uses zero debt. The retention rate is .60. What is the earnings return on new investment? What is the value of the firm's PVGO? D 50 P = == $2,500 k-g .12-.10
Duvall, the manager of the corporate venturing unit introduced in Example 1, has decided to make a bid for Able Manufacturing. Duvall has decided to use an income approach to value Able. As stated in
The Pitts Corporation (financial statements provided in Example 6) had EBIT of $$500$ million and EBITDA of $$800$ million in 2012. Show the adjustments that would be required to find FCFF and
Carla Espinosa is an analyst following Pitts Corporation at the end of 2012. From the data in Example 6, she can see that the company’s sales for 2012 were $$3000$ million, and she assumes that
Medina Werks, a manufacturing company headquartered in Canada, has a competitive advantage that will probably deteriorate over time. Analyst Flavio Torino expects this deterioration to be reflected
Company A’s EPS is $$1.50$ . Its closest competitor, Company B, is trading at a P/E of 22. Assume the companies have a similar operating and financial profile.i. If Company A’s stock is trading
You are calculating a trailing P/E for AstraZeneca PLC (NYSE, LSE: AZN) as of 1 April 2013, when the share price closed at $$50.11$ in New York (£28.25 in London). In its first quarter of 2013,
You are researching the valuation of Taiwan Semiconductor Manufacturing Company(NYSE: TSM, TAIEX : 2330), the world’s largest dedicated semiconductor foundry(www.tsmc.com). Your research is for a
A market price for the common stock of IBM (NYSE: IBM) in early-September 2013 was $$184.15$. IBM’s fiscal year coincides with the calendar year. According to data from Thomson First Call, the
Continuing with the valuation of telecommunication service providers, you gather information on selected fundamentals related to risk (beta), profitability (five-year earnings growth forecast), and
As an energy analyst, you are valuing the stock of an oil exploration company. You have projected earnings and dividends three years out (to t = 3), and you have gathered the following data and
Analysts label stock markets “bubbles” when market prices appear to lose contact with intrinsic values. To many analysts, the run-up in the prices of internet stocks in the US market in the
Sales on a bill-and-hold basis involve selling products but not delivering those products until a later date. 42 Sales on this basis have the effect of accelerating the recognition of those sales
Consider two hypothetical companies, Company A and Company B, that have constant cash revenues and cash expenses (as well as a constant number of shares outstanding) in 2010, 2011, and 2012. In
As a technology analyst, you are working on the valuation of Western Digital (NYSE:WDC), a manufacturer of hard disk drives. As a first estimate of value, you are applying a FCFE model under the
Exhibit 16 gives quarterly dividend data for Canadian telecommunications company BCE Inc. (NYSE: BCE) and semiannual dividend data for the ADRs of BT Group(NYSE: BT), formerly British Telecom.i.
Western Digital Corporation (NYSE: WDC) manufactures hard disk drives. Exhibit 18 presents the company’s consolidated balance sheet as of 29 March 2013.The balance sheet is labeled as unaudited
As of late 2012, the mean consensus earnings forecast for BP plc (LSE: BP.L; NYSE: BP)for the fiscal year ending December 2012 was $$0.91$ . Of the 33 estimates, the low forecast was $$0.87$ ,

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