After graduating from Hult International Business School with honors, you started working for a global investment bank as a stock analyst. Congratulations! You are working on your very first stock recommendation. The stock, "Mama's Table" (ticker MAMA), is a popular mid-priced restaurant chain offering home-cooking style Italian food. MAMA began as a local imitation Italian restaurant in the Shandong province of China in the 1990's, and had since successfully expanded all over China as well as established a network of franchise restaurants in the U.S. that rivals other U.S. restaurant chains in the price range. Since the COVID19 pandemic, MAMA stock has had a precipitous decline, and is currently trading at $15 a share (this was less than half the peak stock price just before the pandemic, which was $40). MAMA however had maintained its annual dividend payment of $1.00 per share. The last dividend was paid at the end of September. It goes without saying that the recovery of MAMA depends heavily on economic recovery in China and in the U.S. Furthermore, MAMA sources almost all its pasta from China (for both the Chinese and U.S. restaurants), and sources almost all its meat (e.g., beef for meat ball etc.) from the U.S. Given the ongoing bilateral trade war, MAMA'S profit margin has been under pressure due to the bilateral tariffs on the pasta and frozen meats shipped back and forth between the two countries. To more deeply understand the future return prospect and risks of MAMA stock, you developed the following scenarios in consultation with the investment banks' macro- economic research group: Scenario 1: An effective COVID19 vaccine is found, and distributed widely. Both China and the U.S. fully recover from the pandemic by the middle of 2021. Trade tensions between China and U.S. moderates and two sides agree to much reduced bilateral tariffs. Under this scenario, MAMA will continue to pay annual dividend of $1.00 a share for three years. And after three years, the stock will have fully recovered and will trade at $50/share. This scenario has a 50% probability. The cost of capital (required rate of return) is 6% in this scenario. Scenario 2: China recovers from the pandemic, while the U.S. was hit with multiple peak infections, and plagued with inefficiencies in vaccine dissemination even after a vaccine was approved in 2021. The US-China trade tension does not ease, and MAMA closes all its restaurants in the U.S. to focus on the Chinese market. In this scenario, MAMA takes a massive loss on its U.S. liquidation and divesture, and therefore suspends its dividend immediately (assume O dividend going forward from today). MAMA' stock however will climb to $25 after two years, after it successfully consolidates and restructures its business to focus on the restructures its business to focus on the Chinese market. This scenario has a 35% probability. The cost of capital (required rate of return) is 7% in this scenario. Scenario 3: Only moderately effective vaccines are found by the end of 2021, and it becomes clear that the manufacturing and distribution of such vaccines is difficult and slow. Although China recovers fully from the pandemic through its draconian shut down and social distancing policy, the U.S. and western Europe struggles to keep infections at bay. Anti-China sentiments in the U.S. and in the west, including Italy reaches a peak. In response, the Chinese government stokes nationalism, and Chinese consumers boycott western goods, including Mama's Table restaurants, as they view MAMA as a symbol of Italian and therefore western cultural imperialism. Under this scenario, MAMA cancels all future dividends from today on, and tries to reinvent itself as a Chinese food restaurant chain (i.e., selling home-style Chinese food rather than Italian). However, the transition nearly bankrupts MAMA. A Chinese Private Equity firm, "White Dragon" offers the shareholders of MAMA $20/share one year from today to pursue this business transition as a private company. This scenario has a 15% probability. The cost of capital (required rate of return) is 8% in this scenario. (Please note, there are 3 parts to this question. Please read the questions carefully as not to miss important information. You must show work to receive full credit. A correct answer alone will not receive full credit.) What is the intrinsic value (or present value) of MAMA under each scenario? (3 pts total, 1 pt for each scenario) What is the expected value (average intrinsic value) of MAMA from the combined scenarios (1 pt)? And what is the expected return for buying the stock today (1 pt)? Would you recommend a "buy", "sell" or "hold" on MAMA? Why? (1 pt) 8:56 AM After graduating from Hult International Business School with honors, you started working for a global investment bank as a stock analyst. Congratulations! You are working on your very first stock recommendation. The stock, "Mama's Table" (ticker MAMA), is a popular mid-priced restaurant chain offering home-cooking style Italian food. MAMA began as a local imitation Italian restaurant in the Shandong province of China in the 1990's, and had since successfully expanded all over China as well as established a network of franchise restaurants in the U.S. that rivals other U.S. restaurant chains in the price range. Since the COVID19 pandemic, MAMA stock has had a precipitous decline, and is currently trading at $15 a share (this was less than half the peak stock price just before the pandemic, which was $40). MAMA however had maintained its annual dividend payment of $1.00 per share. The last dividend was paid at the end of September. It goes without saying that the recovery of MAMA depends heavily on economic recovery in China and in the U.S. Furthermore, MAMA sources almost all its pasta from China (for both the Chinese and U.S. restaurants), and sources almost all its meat (e.g., beef for meat ball etc.) from the U.S. Given the ongoing bilateral trade war, MAMA'S profit margin has been under pressure due to the bilateral tariffs on the pasta and frozen meats shipped back and forth between the two countries. To more deeply understand the future return prospect and risks of MAMA stock, you developed the following scenarios in consultation with the investment banks' macro- economic research group: Scenario 1: An effective COVID19 vaccine is found, and distributed widely. Both China and the U.S. fully recover from the pandemic by the middle of 2021. Trade tensions between China and U.S. moderates and two sides agree to much reduced bilateral tariffs. Under this scenario, MAMA will continue to pay annual dividend of $1.00 a share for three years. And after three years, the stock will have fully recovered and will trade at $50/share. This scenario has a 50% probability. The cost of capital (required rate of return) is 6% in this scenario. Scenario 2: China recovers from the pandemic, while the U.S. was hit with multiple peak infections, and plagued with inefficiencies in vaccine dissemination even after a vaccine was approved in 2021. The US-China trade tension does not ease, and MAMA closes all its restaurants in the U.S. to focus on the Chinese market. In this scenario, MAMA takes a massive loss on its U.S. liquidation and divesture, and therefore suspends its dividend immediately (assume O dividend going forward from today). MAMA' stock however will climb to $25 after two years, after it successfully consolidates and restructures its business to focus on the restructures its business to focus on the Chinese market. This scenario has a 35% probability. The cost of capital (required rate of return) is 7% in this scenario. Scenario 3: Only moderately effective vaccines are found by the end of 2021, and it becomes clear that the manufacturing and distribution of such vaccines is difficult and slow. Although China recovers fully from the pandemic through its draconian shut down and social distancing policy, the U.S. and western Europe struggles to keep infections at bay. Anti-China sentiments in the U.S. and in the west, including Italy reaches a peak. In response, the Chinese government stokes nationalism, and Chinese consumers boycott western goods, including Mama's Table restaurants, as they view MAMA as a symbol of Italian and therefore western cultural imperialism. Under this scenario, MAMA cancels all future dividends from today on, and tries to reinvent itself as a Chinese food restaurant chain (i.e., selling home-style Chinese food rather than Italian). However, the transition nearly bankrupts MAMA. A Chinese Private Equity firm, "White Dragon" offers the shareholders of MAMA $20/share one year from today to pursue this business transition as a private company. This scenario has a 15% probability. The cost of capital (required rate of return) is 8% in this scenario. (Please note, there are 3 parts to this question. Please read the questions carefully as not to miss important information. You must show work to receive full credit. A correct answer alone will not receive full credit.) What is the intrinsic value (or present value) of MAMA under each scenario? (3 pts total, 1 pt for each scenario) What is the expected value (average intrinsic value) of MAMA from the combined scenarios (1 pt)? And what is the expected return for buying the stock today (1 pt)? Would you recommend a "buy", "sell" or "hold" on MAMA? Why? (1 pt) 8:56 AM