Question
Gamma Limited has: Net Debt of $2,170 million, Total Assets of $6,500 million and Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) of $1,150 million.
Gamma Limited has: Net Debt of $2,170 million, Total Assets of $6,500 million and Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) of $1,150 million. There are 128 million Gamma shares outstanding.
Other companies within the same industry category which are considered to be comparable to Gamma Ltd, have an average Enterprise Value to EBITDA ratio (EV/EBITDA) of 3.5x and an average Price to Earnings (P/E) ratio of 8x. (Enterprise Value = Market Capitalisation + Net Debt).
An investor is considering the purchase of 10,000 shares of Gamma Ltd for $13.90 per share.
- Given the above information, would you recommend the purchase of shares in Gamma at $13.90 per share?
Assume the investor purchased the shares on a margin of 45% at an interest rate of 6% per annum and pays commissions amounting to 3% of the transaction value on both the purchase and sale of the stock. The investor then sells the stock two years later for $15.10 per share. (Assume that purchasing the shares on a margin of 45% means that you borrow 55% of the value of the shares when making the purchase.)
- What is the investors holding period return, and what is the equivalent annual rate of return?
- Ignore part (ii). Generally, what is the impact on expected return of a purchase on margin? (There is no need to use formulas in your response)
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