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I would like help with the Baines Investment Inc, case study. Any help will be appreciated.

CASE Baines Investments, Inc. Baines Investme11ts, Inc. is a private equity investment company located in Dallas, Texas. The firm specializes in i11vesting in privately owned firms that it feels it can sell in the future at a higher price or eventually take public. Inmost cases, the firm engages in leveraged buyouts, in wl1ich it borrows money to buy a p11blicly traded company with the intentio11 of taking it private. After restrt1ctl1ring the firm by selling off 11m1ecessary assets and tightening budgets to increase profitability, Bai11es Investments and other participating investing firms eventually hope to take the company back to tl1e public market at a much higher price than they paid to take it private. ships for the U .S. government. It also produces automatic flight control radar systems and intercept missiles. It is privately traded . Joel's firm normally took the present value of future dividends, earnings, or cash flow to determine value. 111 Joel's first analysis he decided to take the present value of future dividends. Because dividends appeared to be growin g at a constant rate for the foreseeable fut11re, he decided to use the constant growth rate dividend valt1ation model in which the price (Po) or value was equal to D r o - An Upcoming Deal Joel Horlen recently received l1is MBA from Baylor University and was hired by Baines Investment, Inc. In his first six months on the job, he assisted other analysts in evaluating companies, but now he had an assignment of his own. The company he was to assess is United Defense Systems (UDS). Tl1e firm man11factures warships andcargo Dl Ke - g A careful analysis of company data indicated that D1, or the next period's divide11d would be $1.80. The growth rate g appeared to be 5.5 percent. was supposed to represent the cost of common equity and was normally given to him in his classroom exercises while working on his MBA. However, his employer, Baines Investment, Inc., insisted that he use the capital asset :pricing model to compute the cost (or required retun1) on com1non equity. C ase 14 T h e t e r m K e i n t h e f o r m u l a a b o v e r e p r e s e n t s t h e c o s t o f c o m m o n e q u i t y , b u t c a n e a s i l y b e r e p l a c e d b y K ; , t h e r e q u i r e d r e t u r n 0 1 1 c o m 1 n o n e q u i t y u 1 1 d e r t l 1 e c a p i t a l a s s e t p r i c i n g m o d e l . O n c e K . J i s c o m p u t e d i t i s m e r e l y s u b s t i t u t e d f o r K e i n t l ) e p r i o r f o r m u l a . Now the formula for -. K 1 is equal to R.r + /J ( K m - R_ 1- ) where: K _1 Required return on common stock R_ 1 Risk-free rate -use 6% - M a r k e t r a t e o f r e t u r n - K u s e 1 1 1 % /3 B e t a . T h e v o l a t i l i t y o f a s t o c k ' s r e t u r n r e l a t i v e t o t h e m a r k e t ' s r e t u r n . T o b e d e t e r m i n e d . A s t o c k w i t h a b e t a o f o n e w o u l d b e a s v o l a t i l e a s t h e m a 1 k e t . A s t o c k w i t h a b e t a o f 1 . 2 0 w o u l d b e 2 0 p e r c e n t m o r e v o l a t i l e t h a n t h e 1 n a r k e t , a 1 1 d a s t o c k w i t h a b e t a o f . 8 0 w o u l d b e 2 0 p e r c e n t l e s s v o l a t i l e t h a n t h e m a r k e t a n d s o o n . T h e b e t a w a s 1 1 o r m a l l y c o m p 1 1 t e d o v e r a f i v e y e a r p e r i o d f o r a p u b l i c l y t r a d e d B e c a 1 1 s e t h e c o m p a n y ( U D S ) t h a t J o e l H o r l e n w a s e v a l u a t i n g w a s p r i v a t e a n d h a d n o p u b l i c s t o c k p r i c e , J o e l d e c i d e d t o u . s e a n a l t e r 1 1 a t i v e m e t h o d t o c o m p u t e b e t a . H e w o u l d t a k e t h e a v e r a g e b e t a o f f i v e p u b l i c l y t r a d e d c o m p a n i e s i n t h e s a m e i n d u s t r y a s U D S ( A e r o s p a c e / d e f e n s e ) . T l 1 e b e t a s f o r t h e f i v e c o m p a n i e s a r e a s f Company Armour Holding BE Aerospace General Dynam Lockheed Marti Northrop Gruma Required 1. Compute the average beta for tl1e five firms in the aerospace/defe nse industry. 2. N o w , c o m p u t e t h e r e q 1 1 i r e d r a t e o f r e t u r n ( ) u s i n g t h e c a p i t a l a s s e t p r i c i n g m o d e l . R 1 i s e q u a l _ t o 6 p e r c e n t a n d K , , 1 i s e q u a l t o ' .-" K _1 1s equal to R1. + /3 (K n I 1 - R_r} . 3. N e xt , c o m p '- vt e tl1 e st o c k pr ic e ( P o ) us i1 1g th e fo r m ul a: Po = - 1I 0,-. / , K.- g .J N ot e K J (t h e re q ui re d re tu r n o n c o m m o n st o c k ) is b ei n g s u b st it ut e d f o r K e (t l1 e c o st o f c o m m o n e q u. it y) . T h e y b o t h r e p r e s e n t t h e s a m e 7 5 , ; , t h i n g , t h e r e t u r n t h a t s t o c k h o l d e r s 4. d e m a n d . " U si 1 1 g y ot 1r a ns w er fr o m qt 1e sti o n 3 a n d as su m in g ea rn in g s p er .,.. _ _ .... share are $2.40, what is tJ1e PIE ratio? ..-:- s. B e c a u s e t h e f i r m i s p r i v a t e l y h e l d a 1 1 d t h u s t h e r e i s n o p u b l i c m ar k et fo r it s se c ur iti es , th er e w ill b e a li q ui di ty di sc o u nt of 2 0 p er ce nt fr o m tl1 e st o c k pr ic e c o m p ut e d in q u es ti o n 3. W h at w il l th e a dj u st e d st o c k pr ic e b e? W h at w ill th e a dj us te d P I E b e? 6. A ss u m e th at Jo el H or le n di sc o ve rs th at U D S is ab o ut to w in a m aj or n. e w d ef e n 6 ,d. e p ar t1 n e nt c o nt ra ct o n c o m b at ra d ar s ys te m s a n d th e C o m p a n y;' 's v al ue w ill in cr ea se b y 4 0 p er c e1 1t . Ig n or in g th e li q ui di ty di sc ol 1 nf fo r th is ca lc ul at io 1 1, w h at w ill th e 11 e w st o c k pr ic e a n d P I E ra ti o b e ? 7. D i s c u s s t h e i m p a c t o f t h e c o m p a n y d e c i d i n g t o g o p u b l i c s o m e t i m e i n t h e f u t u r e o n t h e l i q u i d i t y d i s c o u n t