INSTRUCTIONS
I.
SHOW YOUR WORK.
II.
YOUR GRADE IS BASED ON YOUR
CORRECTNESS, CONVICTION, ELABORATION AND ELUCIDATION.
III.
YOU SHOULD ANSWER 7 QUESTIONS, TOTALLY. YOU SHOULD DO THE FIRST THREE (3) PROBLEMS AND THE FIRST ESSAY.YOU OUGHT TO ANSWER THREE MORE QUESTIONS OF YOUR CHOICE. A QUESTION IS EITHER AN ESSAY OR A PROBLEM.
IV.
ALL QUESTIONS HAVE THE SAME WEIGHT.
PROBLEMS
A .Lemmon has EAT, depreciation expense, capital expenses and debt principal payments of $4m, $.2m, $.3m, and $.5m respectively. The market ROR has been .18 and the 10 year T bond rate is .04. Between the first and the second years, it has current assets of $11m and $11.4m and current debts of $5m and $5.1m respectively. Its unlevered bheta, D/E and t are 2, 60/40 and .25 respectively. Lemmon’s ROE is 20%, and it plows about 30% of its profits back into its business. Derive the value of Lemmon.
B. Megas produces giros and stuffed grape leaves. It has the following capital structure. Its debt is $60m and its equity is $40M. Its risk free rate is 3%, while the expected return of the market is 10%, and its beta is 1.2. Megas intends to invest $500 m into a giro project wanting to become the biggest seller in the American continent. Thus, it expects to receive $175m (EBIT(1-t)) annually for 20 years on this investment. The depreciation is straight line for 20 years (based on the $500m investment.
For the grape leaves project, Megas will invest $400 million and receive $100m annually, in terms of both operations after tax plus depreciation. Compute the value of Megas.
C .There is a firm, which we are prospecting as a purchase candidate. It has the following features we find attractive. First, it will enable us to sell to the clients of this firm what we already are selling our existing clients. The revenue addition will be $12 million. However, it will induce $3 million more expenses in attaining that higher level of revenue. Secondly, it will enable us to sell a division of the firm that does not rally connect with our operations for $5 million. Thirdly, since there is a lot of repetition of positions ( we are in the same line of business) we can lay off 50 employees permanently. The average salary of those employees is $60,000. The coc of the firm is 10%. Calculate the amount that we can bid to acquire this company.
D. We know the following about Mikhasev. Total assets are $100m, D is $30m, E is $70m, cash is $10m and the # of shares is 1m. We estimate that the market value of equity is 2 times the book value of it. Finally, a fire sale of the firm would bring 60% of the value to the company.
Compute the book value, liquidation value, replacement value and enterprise value per share of Mikhasev.
E. The P/E ratio is 8. The D/E is 90/10, the tax rate is .20 and the unlevered beta is 3. The net profit margin is .09. Total assets are $100 million and total sales are $60 million. The outstanding shares are 100,000. Derive the price of the stock for next year
F. We have the following information for the Valverde company. The stock pays a $1 dividend and it will grow by 12% the first year, 9% the second year and 3% forever after that. The unlevered bheta is 1, D/E is 75/25 and the tax rate is .3. Additionally, we know the treasury bond rate is .04, and the ROR of the S&P has been 10%. Derive the stock price of Valverde.
G. We want to compute the price of Pabon. It has 2 m shares outstanding and $80 of book value of equity. Pabon expects to sell $20m worth of sales and have EAT of $5m and keep 40% of its profit. Furthermore, it has $100m of assets. Its short term assets grew by $13 million and short term liabilities by $4 million. Moreover, it has depreciation charges of 5% of its assets. Its coe is .12 and its bheta is 1.2. Calculate Pabon’s value.
ESSAYS
A. Explicate the valuation of firms (or industries) by the free cash flow to equity and the operating free cash flow view. After you define both, compare and contrast them to the dividend discounted approach of valuation. Give 3 reasons for the free cash flow approaches as superior to the discounted dividend approach.
B. Elaborate on the balance sheet methods, as performance measures of a company.
C a)Discuss the rate of return and risk of an industry inter temporally. How do industries compare at the same time. Be thorough.
b) Why do we devote so many resources to forecast the GDP when it does not predict the financial markets?
D. Analyze the two industries of package shipping and automobiles based on structural aspects. Structural issues should include things such as demographics, psychographics, regulation and politics. Compare and contrast those two industries.
E. Elaborate on competitive analysis. How do the five factors influence the toy industry versus the chemical industry?
F. Talk on the industries of smart phones and electric vehicles in terms of technology and psychographics.
G. Expound on the industry life cycle and its effect on profitability of firms.