2.) a) How would you value an Internet stock which is currently showing negative operating cash flow and negative net income? (5 marks) b) In relation to mergers and acquisitions, Franks et al. (1987) study the returns to the bidder across different means of paying for the target company. How do the returns to the bidder offering cash differ from those of the bidder paying with equity? Can you offer a possible explanation? (5 marks) C) Assuming that ROCE (return on common equity). g (the growth rate of the book value of common shareholders' equity) and re (the cost of equity capital) are constant, that markets are efficient, and: the company's dividend payout ratio d is 20%, gis 8% the company's stock has an equity beta of 1.2. the risk free rate is 1% and the market risk premium is 6%, what is the ROCE priced into the market? (2 marks) d) Continuing with the information given in part (c), what will be the percentage effect on the stock's intrinsic value if: 0) the market risk premium increases to 7% (ii) the market expectation of the dividend payout ratio changes to 50%; (i) the market expectation of future ROCE changes to 9%? Try to explain the direction and magnitude of each change. (9 marks) Hint: you may wish to use the formula ROCE- VE e) Briefly explain why performing Business Strategy Analysis first allows us to perform better Accounting Analysis. (4 marks) UL20/0374 Page 4 of 12 2.) a) How would you value an Internet stock which is currently showing negative operating cash flow and negative net income? (5 marks) b) In relation to mergers and acquisitions, Franks et al. (1987) study the returns to the bidder across different means of paying for the target company. How do the returns to the bidder offering cash differ from those of the bidder paying with equity? Can you offer a possible explanation? (5 marks) C) Assuming that ROCE (return on common equity). g (the growth rate of the book value of common shareholders' equity) and re (the cost of equity capital) are constant, that markets are efficient, and: the company's dividend payout ratio d is 20%, gis 8% the company's stock has an equity beta of 1.2. the risk free rate is 1% and the market risk premium is 6%, what is the ROCE priced into the market? (2 marks) d) Continuing with the information given in part (c), what will be the percentage effect on the stock's intrinsic value if: 0) the market risk premium increases to 7% (ii) the market expectation of the dividend payout ratio changes to 50%; (i) the market expectation of future ROCE changes to 9%? Try to explain the direction and magnitude of each change. (9 marks) Hint: you may wish to use the formula ROCE- VE e) Briefly explain why performing Business Strategy Analysis first allows us to perform better Accounting Analysis. (4 marks) UL20/0374 Page 4 of 12