Questions and Answers of Equity Asset Valuation

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$ ,
Exhibits 24 and 25 provide information about the earnings surprise history for two companies:Exxon Mobil Corporation (NYSE: XO M) and Volkswagon AG (Xetra: VOW).i. Explain how XO M’s SUE score of
Janet Larsen manages an institutional portfolio and is currently looking for new stocks to add to the portfolio. Larsen has a commercial database with information on US stocks. She has designed
Bugg Properties’ expected EPS is $$2.00$ $$2.50$ and $$4.00$ for the next three years.Analysts expect that Bugg will pay dividends of $$1.00$ $$1.25$ and $$12.25$ for the three years.
To recap the data from Example 3, Bugg Properties has expected earnings per share of$$2.00,$ $$2.50,$ and $$4.00$ and expected dividends per share of $$1.00,$ $$1.25,$ and $$12.25$ for
Robert Sumargo, an equity analyst, is considering the valuation of Google (NDQ:-GOOG), in late 2013 when a recent closing price is $$896.57.$ Sumargo notes that in general GOOG had a fairly high
Joseph Yoh is evaluating a purchase of Canon, Inc. (NYSE: CAJ). Current book value per share is $$26.24$ and the current price per share is $$34.68$ (from Value Line, 26 July 2013). Yoh expects
Suppose a company has a beta of 1.1. The risk-free rate is 5.6 percent, and the equity risk premium is 6 percent. The current dividend of $$2.00$ is expected to grow at 5 percent indefinitely. The
Bob Inguigiatto, CFA, has been given the task of developing mean return estimates for a list of stocks as preparation for a portfolio optimization. On his list is NextEra Energy, Inc. (NYSE: NEE),
An analyst is reviewing the valuation of DuPont (NYSE: DD) as of the beginning of July 2013 when DD is selling for $$52.72$ . In the previous year, DuPont paid a $$1.70$ dividend that the
IBM (as of early 2013) pays a dividend of $$3.30$ per year. A current price is $$194.98.$ An analyst makes the following estimates:• the current required return on equity for IBM is 9 percent,
Elaine Bouvier is evaluating Energen (NYSE: EGN) for possible inclusion in a smallcap growth-oriented portfolio. Headquartered in Alabama, EGN is a diversified energy company involved in oil and gas
Yang Co. is expected to pay a $$21.00$ dividend next year. The dividend will decline by 10 percent annually for the following three years. In Year 5, Yang will sell off assets worth $$100$ per
In Example 17, the analyst estimated the dividend growth rate of IBM in the final stage of a three-stage model as 6.75 percent. This value was based on the expressionIBM’s payout ratio has
John Smith is the sole shareholder and CEO of Able Manufacturing, Inc. Smith has put Able up for sale in advance of his retirement. James Duvall, a manager in the corporate venturing unit of a public
Duvall and his advisers have decided to use an income approach to value Able Manufacturing.Because of its years of operating successfully and its owner’s conservative nature, Able operated with
Duvall and his team are comfortable with the normalized earnings, growth, and discount rate estimated for Able. Detailed projections for Able are not developed by management. Suppose that free cash
Duvall decides to use the GPCM to develop a value indication for Able that is independent of the FCF indication he is also pursuing. Duvall believes that many acquirors apply a multiple of market
In addition to the income approach and the guideline public company method, the guideline transactions method was considered and applied. Duvall and his advisers noted:• Pricing multiples from
In a valuation of a financial services company, a business appraiser estimated four values for the company using four different approaches, which he characterized as follows:i. Discounted cash flow
Suppose that Jane Doe owns 10 percent of the stock of Able, and that the remaining 90 percent is held by CEO John Smith. Smith is interested in selling Able to a third party. Smith advised Doe that
LaForge Systems, Inc. has net income of $285 million for the year 2008. Using information from the company’s financial statements given here, show the adjustments to net income that would be
For LaForge Systems, whose financial statements are given in Problem 2, show the adjustments from the current levels of CFO (which is $427 million), EBIT ($605 million), and EBITDA ($785 million) to
John Jones, CFA, is head of the research department of Peninsular Research. One of the companies he is researching, Mackinac Inc., is a US-based manufacturing company.Mackinac has released the June
Holt’s FCFE (in millions) for 2008 is closest to:A. $175.B. $250.C. $364.Ryan Leigh is preparing a presentation that analyzes the valuation of the common stock of two companies under consideration
Cagiati Enterprises has FCFF of 700 million Swiss francs (CHF) and FCFE of CHF620 million. Cagiati’s before-tax cost of debt is 5.7 percent, and its required rate of return for equity is 11.8
Cane Distribution, Inc., incorporated on 31 December 2009 with initial capital infusions of $$224$,000 of debt and $$336$,000 of common stock, acts as a distributor of industrial goods. The
Use the information from the statement of cash flows given in Exhibit 5 to calculate FCFF for the three years 2010−2012. The tax rate (as given in Exhibit 1) is 30 percent. EXHIBIT 5 Cane
Syngenta AG (SWX: SYNN), a company domiciled and incorporated in Switzerland, is a world-leading agribusiness operating in the Crop Protection, Seeds and Lawn and Garden markets. Crop Protection
Ryanair Holdings PLC (LSE: RYA) operates a low-fare scheduled passenger airline serving short-haul, point-to-point routes between Ireland, the United Kingdom, Continental Europe, and Morocco. The
The balance sheet, income statement, and statement of cash flows for the Pitts Corporation are shown in Exhibit 11. Note that the statement of cash flows follows a convention according to which the
Use Pitts Corporation data to compute its FCFF for the next three years. Assume that growth in FCFF remains at the historical levels of 15 percent a year. The answer is (in millions): 2012 Actual
Continuing her work, Espinosa decides to forecast FCFF for the next five years. She is concerned that Pitts Corporation will not be able to maintain its historical EBIT margin and that the EBIT
Espinosa decides to forecast FCFE for the year 2013. She uses the same expectations derived in Example 9. Additionally, she expects the following:• the profit margin will remain at 8 percent (=
A recent job applicant made some interesting comments about FCFE and FCFF: “I don’t like the definitions for FCFE and FCFF because they are unnecessarily complicated and confusing. The best
Welch Corporation uses bond, preferred stock, and common stock financing. The market value of each of these sources of financing and the before-tax required rates of return for each are given in
YPF Sociedad Anonima (NYSE: YPF) is an integrated oil and gas company headquartered in Buenos Aires, Argentina. Although the company’s cash flows have been volatile, an analyst has estimated a per

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