Problem 2:
You are given three companies, General Motors (GM), Renault (RNO) and Toyota Motors (TM) and you are asked to assess their valuation and the opportunity to combine those shares in the same portfolio.
1) How would you categorize the GM, RNO and TM shares? What kind of investment strategy would those shares meet? Would you better invest in those shares for the short run or the long run? Explain your views.
2) 20) GM and RNO are experiencing difficulties which make you think that the price of the shares may fall down in the following months. How could you hedge any capital loss if you were already holding those shares in your portfolio? Explain precisely what financial instruments you may recommend (you may use the list given in appendix).
3) 21) Current GM price is $24.20. If you have the choice to invest $24,200 either in GM shares or in call option on GM shares (Strike=$25), what is your loss if the share price goes down to $20? Draw a payoff diagram for the call option. Label on the graph the maximum loss possible and the break-even point. Read the appendix to find the figures you may need to answer the question.
Appendix for Problem #2 GENERAL MOTORS (GM) General Motors Corporation (GM) is primarily engaged in the worldwide development, production and marketing of cars, trucks and parts. The Company develops, manufactures and markets its vehicles worldwide through its four automotive regions: GM North America, GM Europe, GM Latin America/Africa/Mid-East and GM Asia Pacific. GMGs finance and insurance operations are primarily conducted through GMAC LLC (GMAC). GMAC was a wholly owned subsidiary, until November 30, 2006, when GM sold a 51% controlling ownership interest in GMAC. As a result, the Company holds a 49% ownership interest in GMAC, which provides a range of financial services. GMGs total worldwide car and truck deliveries were 9.1 million during the year ended December 31, 2006. In January 2007, Isuzu Motors Limited acquired the 100% stake in a diesel engine development company, which is a joint venture between Isuzu Motors and General Motors Corporation RENAULT (RNO) Renault is an international automobile manufacturer that is based in France. The Company acts as a parent company for its subsidiaries that are located throughout the world. Renault has two main areas of business activity: the Automobile division, which handles the design, manufacture and marketing of vehicles, and the Sales Financing division, which is closely linked to the Company's sales activities. The Automobile division comprises the Renault, Samsung (South Korea) and Dacia (Romania) brands, and is engaged in the design, development and marketing of passenger cars and light-commercial vehicles. In 2006, this division's revenues represented 95.3% of Renault's total revenues. The Sales Financing division provides financial and commercial services, and is comprised of RCI Banque and its subsidiaries, a total of approximately 60 companies. In 2006, the Sales Financing division generated 4.6% of Renault's total revenues. TOYOTA (TM) TOYOTA MOTOR CORPORATION (TOYOTA) primarily conducts business in the automotive industry. Toyota also conducts business in the finance and other industries. Its business segments are automotive operations, financial services operations and all other operations. Its automotive operations include the design, manufacture, assembly and sale of passenger cars, minivans and trucks and related parts and accessories. Toyota's financial services business consists primarily of providing financing to dealers and their customers for the purchase or lease of Toyota vehicles. Its financial services also provide retail leasing through the purchase of lease contracts originated by Toyota dealers. Related to Toyota's automotive operations is its development of intelligent transport systems. Toyota sells its vehicles in more than 170 countries and regions. Toyota Gs primary markets for its automobiles are Japan, North America, Europe and Asia. Financial Highlights Sales Income Net Profit Margin Return on Equity Debt/Equity Ratio Revenue/Share Earnings Share Book Value/Share Dividend Rate Payout Ratio P/E GM $181.12 BH $43.30 Bil -23.97% NA NA $320.00 $68.43 $65.53 $1.00 NA NA RNO 39.95 Bil 2.54 B1 6.55% 12.32% 1.44 152.87 9.72 82.03 3.1 30.00% 7.2 TM $243.58 Bil $17.21 B1 6.29% 15.49% 1.09 $152.74 $10.8 $73.39 $2.39 23.00% 10.3 GM RNO TM S&P 500 -2.4 92 Industry (US) 8.80 605.70 16.00 -7.30 -278.60 0.36 -15.2 7.5 Growth Rates % Sales (Qtr vs year ago atr) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) 7.70 2.1 11.03 6.77 13.47 NA 24.19 8.72 22.39 27.5 19.82 10.44 -12.94 33.78 19.28 GEN MOTORS as of 22-Feb-2000 1202 *100 +302 +607 Amuro 2 OZ -202 100.00 Seps JOY Mayo HOR volume millions 50.00 0.00 Copyright 2008 Yahool Inc. http://finance.yahoo.com *GSPC represents S&P 500 RNO.PA represents Renault TM represents Toyota Motors GM 0.2527 0.0639 RNO 0.1686 0.0284 TM 0.1534 0.0235 Standard deviation Variance Correlation coefficient S&P500 0.0819 0.0067 GM RNO TM 1.0000 0.4877 0.7932 0.4877 1.0000 0.6769 0.7932 0.6769 1.0000 0.6342 0.8843 0.7967 GM OPTIONS QUOTATION GM SHARE ON FEB 25: $24.20 CALL Expire at close Fri Sep 19, 2008 Strike Symbol Last Vol 12.50 GMIS.X 14.50 0 17.50 GMIT.X 10.80 0 20.00 GMID.X 6.40 32 22.50 GMIX.X 4.58 200 25.00 GMIEX 3.25 220 27.50 GMIY X 2.28 235 30.00 GMEX 1.60 40 32.50 GMIZ.X 1.05 27 35.00 GMIGX 0.54 31 37.50 GMIU.X 0.40 6 40.00 GMIH.X 0.19 15 42.50 GMIV.X 0.12 64 RNO OPTIONS QUOTATION RNO ON FEB 25: 71.67 CALL Expire at close Fri Sep 19, 2008 Strike Symbol Last Vol 70,00 1627A.PA 0,00 0 75.00 3127B.PA 0,48 2.000 85.00 1436C.PA 0,00 0 85,00 2781B PA 0,20 1.000 86.00 1501A_PA 0,00 0 90.00 1898S PA 0,00 0 95,00 1435C.PA 0,18 46.000 95,00 2466B PA 0,11 3.000 100.00 4040S, PA 0,13 6.000 105,00 1434C.PA 0,26 48.000 105.00 2180B.PA 0,08 10.000 110,00 1666Z. PA 0,00 0 110,00 3702252 PA 0,00 0 110,00 1413A. PA 0,05 1.000 110,00 1888B.PA 0,15 0 110,00 3576286.PA 0,15 1.000 110.00 1993H.PA 0,00 0 115,00 2666SPA 0,15 34.000 130,00 1188B.PA 0,32 0 130.00 3439291. PA 0,32 0 130,00 2990S.PA 0,10 150.000 PUT Expire at close Fri, Sep 19, 2008 Strike Symbol Last Vol 10.00 GMUBX 12.50 GMUS.X 15.00 GMUC.X 17.50 GMUTX 20.00 GMUDX 22.50 GMUX.X 25.00 GMUEX 27.50 GMUY.X 30.00 GMUEX 32.50 GMUZ.X 35.00 GMUG.X 37.50 GMUUX 40.00 GMUH.X 42.50 GMUV.X 0.45 536 0.66 148 1.01 786 1.71 31 2.24 59 3.20 2,376 4.35 143 6.00 133 7.70 1 9.435 11.50 64 14.40 1 14.20 0 16.90 0 0.27 PUT Expire at close FriSep 19, 2008 Strike Symbol Last Vol 60,00 31298 PA 8.000 72.00 18998 PA 0,00 0 75.00 1669Z PA 1,30 3.000 75.00 1437C.PA 1,31 4.000 80,00 2469B. PA 0,80 1.000 82.00 48568 PA 1,06 6.000 Appendix for Problem #2 GENERAL MOTORS (GM) General Motors Corporation (GM) is primarily engaged in the worldwide development, production and marketing of cars, trucks and parts. The Company develops, manufactures and markets its vehicles worldwide through its four automotive regions: GM North America, GM Europe, GM Latin America/Africa/Mid-East and GM Asia Pacific. GMGs finance and insurance operations are primarily conducted through GMAC LLC (GMAC). GMAC was a wholly owned subsidiary, until November 30, 2006, when GM sold a 51% controlling ownership interest in GMAC. As a result, the Company holds a 49% ownership interest in GMAC, which provides a range of financial services. GMGs total worldwide car and truck deliveries were 9.1 million during the year ended December 31, 2006. In January 2007, Isuzu Motors Limited acquired the 100% stake in a diesel engine development company, which is a joint venture between Isuzu Motors and General Motors Corporation RENAULT (RNO) Renault is an international automobile manufacturer that is based in France. The Company acts as a parent company for its subsidiaries that are located throughout the world. Renault has two main areas of business activity: the Automobile division, which handles the design, manufacture and marketing of vehicles, and the Sales Financing division, which is closely linked to the Company's sales activities. The Automobile division comprises the Renault, Samsung (South Korea) and Dacia (Romania) brands, and is engaged in the design, development and marketing of passenger cars and light-commercial vehicles. In 2006, this division's revenues represented 95.3% of Renault's total revenues. The Sales Financing division provides financial and commercial services, and is comprised of RCI Banque and its subsidiaries, a total of approximately 60 companies. In 2006, the Sales Financing division generated 4.6% of Renault's total revenues. TOYOTA (TM) TOYOTA MOTOR CORPORATION (TOYOTA) primarily conducts business in the automotive industry. Toyota also conducts business in the finance and other industries. Its business segments are automotive operations, financial services operations and all other operations. Its automotive operations include the design, manufacture, assembly and sale of passenger cars, minivans and trucks and related parts and accessories. Toyota's financial services business consists primarily of providing financing to dealers and their customers for the purchase or lease of Toyota vehicles. Its financial services also provide retail leasing through the purchase of lease contracts originated by Toyota dealers. Related to Toyota's automotive operations is its development of intelligent transport systems. Toyota sells its vehicles in more than 170 countries and regions. Toyota Gs primary markets for its automobiles are Japan, North America, Europe and Asia. Financial Highlights Sales Income Net Profit Margin Return on Equity Debt/Equity Ratio Revenue/Share Earnings Share Book Value/Share Dividend Rate Payout Ratio P/E GM $181.12 BH $43.30 Bil -23.97% NA NA $320.00 $68.43 $65.53 $1.00 NA NA RNO 39.95 Bil 2.54 B1 6.55% 12.32% 1.44 152.87 9.72 82.03 3.1 30.00% 7.2 TM $243.58 Bil $17.21 B1 6.29% 15.49% 1.09 $152.74 $10.8 $73.39 $2.39 23.00% 10.3 GM RNO TM S&P 500 -2.4 92 Industry (US) 8.80 605.70 16.00 -7.30 -278.60 0.36 -15.2 7.5 Growth Rates % Sales (Qtr vs year ago atr) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) 7.70 2.1 11.03 6.77 13.47 NA 24.19 8.72 22.39 27.5 19.82 10.44 -12.94 33.78 19.28 GEN MOTORS as of 22-Feb-2000 1202 *100 +302 +607 Amuro 2 OZ -202 100.00 Seps JOY Mayo HOR volume millions 50.00 0.00 Copyright 2008 Yahool Inc. http://finance.yahoo.com *GSPC represents S&P 500 RNO.PA represents Renault TM represents Toyota Motors GM 0.2527 0.0639 RNO 0.1686 0.0284 TM 0.1534 0.0235 Standard deviation Variance Correlation coefficient S&P500 0.0819 0.0067 GM RNO TM 1.0000 0.4877 0.7932 0.4877 1.0000 0.6769 0.7932 0.6769 1.0000 0.6342 0.8843 0.7967 GM OPTIONS QUOTATION GM SHARE ON FEB 25: $24.20 CALL Expire at close Fri Sep 19, 2008 Strike Symbol Last Vol 12.50 GMIS.X 14.50 0 17.50 GMIT.X 10.80 0 20.00 GMID.X 6.40 32 22.50 GMIX.X 4.58 200 25.00 GMIEX 3.25 220 27.50 GMIY X 2.28 235 30.00 GMEX 1.60 40 32.50 GMIZ.X 1.05 27 35.00 GMIGX 0.54 31 37.50 GMIU.X 0.40 6 40.00 GMIH.X 0.19 15 42.50 GMIV.X 0.12 64 RNO OPTIONS QUOTATION RNO ON FEB 25: 71.67 CALL Expire at close Fri Sep 19, 2008 Strike Symbol Last Vol 70,00 1627A.PA 0,00 0 75.00 3127B.PA 0,48 2.000 85.00 1436C.PA 0,00 0 85,00 2781B PA 0,20 1.000 86.00 1501A_PA 0,00 0 90.00 1898S PA 0,00 0 95,00 1435C.PA 0,18 46.000 95,00 2466B PA 0,11 3.000 100.00 4040S, PA 0,13 6.000 105,00 1434C.PA 0,26 48.000 105.00 2180B.PA 0,08 10.000 110,00 1666Z. PA 0,00 0 110,00 3702252 PA 0,00 0 110,00 1413A. PA 0,05 1.000 110,00 1888B.PA 0,15 0 110,00 3576286.PA 0,15 1.000 110.00 1993H.PA 0,00 0 115,00 2666SPA 0,15 34.000 130,00 1188B.PA 0,32 0 130.00 3439291. PA 0,32 0 130,00 2990S.PA 0,10 150.000 PUT Expire at close Fri, Sep 19, 2008 Strike Symbol Last Vol 10.00 GMUBX 12.50 GMUS.X 15.00 GMUC.X 17.50 GMUTX 20.00 GMUDX 22.50 GMUX.X 25.00 GMUEX 27.50 GMUY.X 30.00 GMUEX 32.50 GMUZ.X 35.00 GMUG.X 37.50 GMUUX 40.00 GMUH.X 42.50 GMUV.X 0.45 536 0.66 148 1.01 786 1.71 31 2.24 59 3.20 2,376 4.35 143 6.00 133 7.70 1 9.435 11.50 64 14.40 1 14.20 0 16.90 0 0.27 PUT Expire at close FriSep 19, 2008 Strike Symbol Last Vol 60,00 31298 PA 8.000 72.00 18998 PA 0,00 0 75.00 1669Z PA 1,30 3.000 75.00 1437C.PA 1,31 4.000 80,00 2469B. PA 0,80 1.000 82.00 48568 PA 1,06 6.000
