3. General Electric (GE) hires you, a consultant from McKinsey & Company to advise the firm on how to improve its performance. GE has an EBIT of 1 billion in 2020, a total asset of 10 billion, and a total debt of 5 billion. The interest rate on GE's debt is 15%. You focus on improving GEs ROE through reducing its debt. You calculated that GE's interest rate would decrease to 10% if its debt decreases to 2 billion, and 5% if its debt decreases to 1 billion. Assume GEs ROA is not affected by its level of debt. Should GE choose a debt of 5, 2, or 1 billion? Show your calculation. (Reminder: Total Asset = Debt + Shareholder's Equity) 2. In Apple's just-released financial report, it had an carnings per share of E. = $4. It has also just paid dividend per share of Do = $1. The risk-free rate is 0%, Apple stock's beta is 1, and the expected market return is 10%. Currently, Apple has a stock price of $100. You assume Apple's dividend grows at a constant rate. I a. What is Apple's ROE implied by the dividend discount model? (That is, you need to use the dividend discount model to solve Apple's ROE) After reading Apple's financial statements, you find that Apple's net income is 9 million and its shareholders' equity is 100 million. b. What is Apple ROE calculated from its financial statement? c. What is Apple's intrinsic value? Is Apple undervalued or overvalued? d. Assume you are the advisor to Tim Cook, the CEO of Apple, you tell him the stock's intrinsic value will increase lo $40 if he starts now to pay all earnings as dividends. Show him the calculation. c. Anothier advisor to Tim Cook, who is against you argues that your approach io stock valuation is lawed. Apple las a particularly bind year due to COVID, so, Apple's ROE should improve when the pandemie enes. To be more specific, lic shows you luis analysis as follows. Ile expects Apple will pay a dividend oft), $25 in 2021, 1): S1.5 in 2022, D. S2 in 2023. The dividend growth rate levels oll' 1112023 with a dividend payout ratio of 555 and an ROI: 0120%. Assume apple's market capitalizationale stays itl ils Clutenu level. Calculate Apple stock's intrinsic value. Is Apple undervallal on overalued? CamScanner 3. General Electric (GE) hires you, a consultant from McKinsey & Company to advise the firm on how to improve its performance. GE has an EBIT of 1 billion in 2020, a total asset of 10 billion, and a total debt of 5 billion. The interest rate on GE's debt is 15%. You focus on improving GEs ROE through reducing its debt. You calculated that GE's interest rate would decrease to 10% if its debt decreases to 2 billion, and 5% if its debt decreases to 1 billion. Assume GEs ROA is not affected by its level of debt. Should GE choose a debt of 5, 2, or 1 billion? Show your calculation. (Reminder: Total Asset = Debt + Shareholder's Equity) 2. In Apple's just-released financial report, it had an carnings per share of E. = $4. It has also just paid dividend per share of Do = $1. The risk-free rate is 0%, Apple stock's beta is 1, and the expected market return is 10%. Currently, Apple has a stock price of $100. You assume Apple's dividend grows at a constant rate. I a. What is Apple's ROE implied by the dividend discount model? (That is, you need to use the dividend discount model to solve Apple's ROE) After reading Apple's financial statements, you find that Apple's net income is 9 million and its shareholders' equity is 100 million. b. What is Apple ROE calculated from its financial statement? c. What is Apple's intrinsic value? Is Apple undervalued or overvalued? d. Assume you are the advisor to Tim Cook, the CEO of Apple, you tell him the stock's intrinsic value will increase lo $40 if he starts now to pay all earnings as dividends. Show him the calculation. c. Anothier advisor to Tim Cook, who is against you argues that your approach io stock valuation is lawed. Apple las a particularly bind year due to COVID, so, Apple's ROE should improve when the pandemie enes. To be more specific, lic shows you luis analysis as follows. Ile expects Apple will pay a dividend oft), $25 in 2021, 1): S1.5 in 2022, D. S2 in 2023. The dividend growth rate levels oll' 1112023 with a dividend payout ratio of 555 and an ROI: 0120%. Assume apple's market capitalizationale stays itl ils Clutenu level. Calculate Apple stock's intrinsic value. Is Apple undervallal on overalued? CamScanner