Question 4 (22 marks) a) You are an equity research analyst, and were told to perform relative valuation on three technology companies based on the following regression analysis: A regression of PE ratio on payout, beta, and growth rate for stocks of all technology firms: PE = 9.0 + 7.0 Payout - 2.0 Beta + 10.0 Growth Company Actual PE Ratio Payout Google 8.88 10% Apple 6.81 5% Microsoft 7.57 1% i) Which company is overpriced? Briefly explain. Beta 1.20 1.10 1.00 Growth 7% 8% 5% (3 marks) ii) Which company is underpriced? Briefly explain. (3 marks) iii) Which company is correctly priced? Briefly explain. (3 marks) b) You are trying to estimate the brand name for Coca-Cola based on the following information in the most recent year): Operating income: $70 million Revenues: $500 million Book value of capital: $700 million Cost of capital: 10% The firm is in stable growth and is expected to growth at 3.5% per year in perpetuity. Corporate tax rate: 30% i) Estimate the value/sales ratio for Coca-Cola. (6 marks) ii) Assume now that the after-tax operating profit margin for generic soft drink company is half of the after-tax operating profit margin for Coca-Cola. Assuming the generic company have the same stable growth and cost of capital as Coca-Cola, and a return on capital of 5%, what is the value of Coca-Cola's brand name? (7 marks)