1.Test Incorporated is trading at a P/E multiple of 16. You have calculated the firms expected growth to be 5%, cost of capital to be 10%, and payout ratio to be 70%. According to your calculations, is Test properly valued? If not, would you buy or sell?

2.You are valuing the privately held firm of ABC. You know that ABC has $500M in EBITDA and Debt of $1500M. Their comparable firm, XYZ, has a TEV/EBITDA multiple of 10. Based on this, how much is the firm ABC worth? How much is the equity worth?

3.Here is some data for three firms in the restaurant industry:

Firm #1: $100 million in debt, $200 million in equity, current estimated equity beta of 3.0

Firm #2: $200 million in debt, $200 million in equity, current estimated equity beta of 3.0

Firm #3: $300 million in debt, $100 million in equity, current estimated equity beta of 4.0

There are no taxes

(a)For each firm, calculate b_unlevered

(b) Using your answer in part (a) and the methods presented in class, what would you predict the equity beta to be for a firm in the restaurant industry with $300 million in debt and $600 million in equity?

4. A firm currently has no debt and its equity beta is currently 2.0.The risk-free rate is 5% and the market risk premium is 7%.The corporate tax rate is 40%.The firm is going restructure its debt-to-equity ratio to ratio to (i.e., they will set D/E = ).The debt they issue will pay 8% interest.If they make this change, what will the firm's new weighted average cost of capital (WACC) be after the change?

5.Fly-by-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants.Neither firm has any debt.The forecasts by Fly-by-Night show that the purchase would increase total annual after-tax cash flows by $600,000 indefinitely from cost savings.The current market value of Flash-in-the-Pan is $10 million.The current market value of Fly-by-Night is $35 million.The appropriate discount rate for any change in cash flows from the merger is 8 percent.

(a)What is the total value of the synergy gain from this merger?

(b)What is the most that Fly-by-Night would be willing to pay for Flash-in-the-Pan?

Fly-by-Night is trying to decide whether it should offer 25 percent of its stock or $15 million in cash for Flash-in-the-Pan.

(c)What is the cost to Fly-by-Night of each alternative?

(d)What is the NPV to Fly-by-Night of each alternative?

(e)Which of these alternatives will Fly-by-Night prefer?

The discussion below pertains to a restructuring conversation within the C-Suite.

Please indicate your reaction to the following statements. As usual, please provide detailed to support to why you either agree or disagree with each statement.

Amy: I have an ambitious idea that may sound a little crazy. I was thinking that we may want

to sell off all of our divisions except our core business which is Division A. With the exception of

Division B, which has some positive synergies with Division A, I do not see any real positive or negative synergies associated with the other divisions.

Statement #1 (below)

Ben: I don't like Amy's idea. The fact that we are a diversified firm with many divisions results in

decreased risk to our shareholders because it is very unlikely that all of our divisions will have a bad year at the same time. Shareholders like this decreased risk and therefore put a premium on our stock. I do not think we want to eliminate this attractive feature of our firm, as this would hurt our stock price.

Reaction #1 (To Ben. No need to provide a reaction to Amy)

Statement #2 (below)

Beatrice: I am not sure I agree with Ben. In fact, I received a call from an investment banker yesterday inquiring as to whether we would sell Division C for $40 million. I recall from graduate school something called the APV approach to valuation. However, when I operationalized this and took our levered cash flows and divided by our unlevered cost of equity I got a number far less than $40 million even after adjusting for the benefits of debt financing. As such, it is nice to know that folks are interested in our division but we should surely pass on this offer.

Reaction #2 (To Beatrice)

Statement #3 (below)

Jason: Why all the talk about selling? Let's focus on some low hanging fruit before we turn to that mess. I have noticed that we always seem to be sitting on a war chest of excess cash. Why don't we take this excess cash and repurchase stock? This restructuring would create value for our shareholders. Or alternatively, we could create value for them by taking all this excess cash and paying off our debt. I cannot wrap my head around the fact that we are constantly issuing debt while at the same time sit on a huge amount of excess cash.

Reaction #3 (To Jason)

Statement #4 (below)

Debbie: I would rather turn back to our discussion involving restructuring our assets and the valuation behind it and not worry about restructuring our financial side at this point. Ironically, I also received a call for an investment banker interested in Division D. They seem to be willing to pay up to $55 million for that division. I did the FTE, WACC, and APV approaches and got different answers to each (which makes sense as they are all operationalized differently). I chose to go with the WACC approach as that gave me the highest value of $35 million. As such, we should cash out at $55 since it's only worth $35 to us. They must have a lot more synergies with this division than we do.

Reaction #4 (To Debbie)